Time Warner Cable Q2 Preview: High Speed Internet Segment Should Lead Growth As Pay-TV Subscriber Attrition Slows

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Time Warner Cable (NYSE:TWC) will report its second quarter earnings on July 30th. [1] We expect the company’s pay-TV subscriber base to continue to shrink in the near term. We estimate that the company’s pay-TV subscriber base will be around 10.58 million for the year 2015, translating into pay-TV revenues of $8.7 billion. In contrast, we expect steady growth in the high speed Internet operations driven by rising residential and business demand for high-speed data services. Consequently, we expect 2015 revenue for the high speed data segment to grow by 13% and come in at around $8.8 billion, fueled by continued growth in the subscriber base as well as higher ARPU. In the recent past, the company has seen rapid growth in its business services segment with revenue growth of approximately 23% for the year 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.

Our price estimate for Time Warner Cable is $183, which implies a 3% discount to the market price.

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 around 31% to Time Warner Cable’s stock value. Even though the pay-TV subscriber base grew by 30,000 subscribers during the first three months of 2015, the increase is just the first instance of quarterly growth in the subscriber base since 2009. [3] The cable company has actually been losing pay-TV subscribers for years now. The overall subscriber base has come down from 13.3 million in 2007 to 10.82 million by the end of March 31, 2015. [2] This can be attributed to a combination of factors, including market saturation, fierce competition amongst cable companies, rise of cheaper alternative platforms such as Netflix (NASDAQ:NFLX), delays in the transition to a digital platform etc.

However, Time Warner Cable was able to slow the pace of the subscriber base decline last year. The company lost 408,000 subscribers in 2014, which is significantly less than the 833,000 subscribers the company lost a year before. [2] Time Warner Cable resorted to blacking out popular channels such as CBS, Showtime, TMC etc. during carriage disputes in the past, which often led to mass subscriber exits. [4] However, the company has not had such an episode in the recent past, which has helped in rebuilding some trust with the subscriber base. We believe Time Warner Cable will continue to lose pay-TV subscribers in the coming years, albeit at a slower pace. Contrastingly, pay-TV average revenue per user (ARPU) for the full year 2014 improved to $75.85 from $74.90 in the prior year. We estimate that the company’s pay-TV subscriber base will be around 10.58 million for the year 2015, translating into pay-TV revenues of $8.7 billion. This forecast takes into account close to 2% growth in ARPU.

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.

High Speed Data Segment Will See Continued Growth In Subscriber Base And ARPU

We estimate that the high speed data business accounts for more than 47% of Time Warner Cable’s stock value. The company has seen rapid growth in this segment in recent years and its subscriber base stood at 12.58 million as of March 31, 2015, as compared to less than 8 million in 2007. [2] The company added around 650,000 high speed data subscribers last year while average monthly subscription fees also grew by around 7%. [2] Time Warner Cable also added 315,000 high-speed data subscribers in Q1 2015 in what was the company’s best quarter in terms of subscriber additions since Q1 2007. We expect 2015 revenue for the high speed data segment to grow by 13% and come in at around $8.8 billion, fueled by continued growth in the subscriber base as well as the average monthly subscription fees.

High speed Internet has remained the leading growth factor for the cable companies for quite some time now. There is a boom in demand 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 75% in December 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 high speed data subscribers throughout our forecast period, in part driven by its triple play bundles. Triple play bundling is the combining of the three services offered by the company — pay-TV, high speed internet and voice — into one package. This bundling helps reduce the subscription fees for subscribers as it saves on infrastructure costs and leads to operational efficiencies and economies of scale.

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Notes:
  1. Time Warner Cable to Report 2015 Second-Quarter Results, July 8, 2015, Time Warner Cable Investor News []
  2. Time Warner Cable’s SEC Filings [] [] [] [] []
  3. Time Warner Cable’s SEC Filings []
  4. Time Warner Cable lost record 306,000 subscribers amid CBS blackout, October 31, 2013, The Verge []