Time Warner Cable Q2 Earnings: High Speed Data Leads Growth, Pay-TV Subscriber Losses Decline

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Time Warner Cable (NYSE:TWC) reported its second quarter earnings recently. [1] The company added 172,000 high speed data subscribers but also lost 45,000 pay-TV subscribers during the quarter. This result underscores the changing complexion of Time Warner Cable’s (TWC) business. Even though the company made its name in the past selling cable services, it is the high speed internet segment that is leading the growth charge in recent years. We expect the company’s high-speed Internet business to continue to bring in more customers, while its pay-TV business will likely continue losing customers in the foreseeable future. However, the growth in pay-TV ARPU will compensate for the subscriber losses and keep pay-TV revenues stable in the coming years.

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In the first earnings call since the announcement of the proposed merger with Charter Communications (NASDAQ:CHTR), TWC’s management talked about how shareholders will receive more for their shares from the Charter deal in comparison to the earlier proposed Comcast (NASDAQ:CMCSA) buyout. The management believes the increase in the deal consideration has been brought about by the improvement in the results of the company in the last two years. The Charter-TWC deal is currently pending review at the FCC and we believe that it will face fewer regulatory hurdles than did the Comcast-TWC merger. (Read in detail – Our Thoughts On The Time Warner Cable-Charter Merger) The FCC recently granted approval to the DirecTV (NASDAQ:DTV)-AT&T (NYSE:T) merger and we believe that the Charter-TWC combine will also be granted approval in due course of time. However, Charter could need to take on as much as $29.3 Billion in additional debt in order to finance the transaction. [2] Time Warner Cable already carries debt worth $23 billion on its balance sheets while Charter’s pre-existing debt obligations are close to $14 billion. The resulting debt levels of the post-merger entity could attain worrisome proportions. (Read in detail – Watch Out For TWC-Charter Combo’s Post-Deal Debt Levels)

The company’s overall revenues increased by 3.5% to $5.93 billion for the quarter, but missed the consensus estimate by $10 million. [2] The company’s business services segment continued to outperform with 16% 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 15.6%, primarily due to the company’s investments in improving network reliability, upgrading older equipment and expanding its network. [2]

High speed Data Segment Leads Growth For TWC

We estimate that high-speed data segment contributes close to 47% to TWC’s stock value. The segment’s residential revenues increased by 8.5% to $1.74 billion while its business services revenues jumped 18% to $391 million during the quarter. [2] This can be attributed to continued growth both in ARPU and the subscriber base. The ARPU for residential high-speed data segment increased approximately 2.4% to $48.04 in Q2 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 76%, leaving enough room for growth. [3] We estimate that, in the long run,  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. [4]

Pay-TV Subscriber Losses Continue, Albeit At A Reduced Pace

TWC’s pay-TV subscriber base shrank by 45,000 subscribers during the last quarter. [2] The second quarter is historically a weak quarter for the pay-TV industry and the subscriber base usually shrinks during this period. Taking this into perspective, the company had its best second quarter since 2008. By comparison, TWC had lost 152,000 and 191,000 subscribers during Q2 2014 and Q2 2013 respectively. [2] Pay-TV revenues stood at $2.51 billion for the quarter, down 1.3% from the prior year quarter. [2]

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 added subscribers in Q1 2015, the first instance of quarterly growth in the subscriber base since 2009. 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. More and more people are embracing lower cost options, including free programming and online video services such as Netflix (NYSE:TWC), Hulu, Sling TV and Amazon Prime.

TWC has also not shown any inclination to aggressively pursue cost efficient skinny-bundles, similar to those introduced by rival Verizon. The company had stated earlier that it does not want to be a pioneer on this initiative, but will be a fast follower if the trend catches on. [5] TWC believes that customers derive more value from their triple-play bundling. Triple play bundling is the combining of the three services offered by the company — pay-TV, high speed internet and voice — into one package. The company management stated on the earnings call that 80% of the video subscriber base opt for the full bundle. [6] 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 Reports 2015 Second-Quarter Results, July 30, 2015, Time Warner Cable Investor News []
  2. Time Warner Cable’s SEC Filings [] [] [] [] [] [] []
  3. The State of the Internet Q1 2015 Report, Akamai []
  4. NEARLY 1.2 MILLION ADDED BROADBAND IN THE FIRST QUARTER OF 2015, May 15, 2015, Leichtman Research Group []
  5. Time Warner Cable (TWC) Robert D. Marcus on Q1 2015 Results – Earnings Call Transcript, April 30, 2015, Seeking Alpha []
  6. Time Warner Cable (TWC) Robert D. Marcus on Q2 2015 Results – Earnings Call Transcript, July 30, 2015, Seeking Alpha []