Time Warner Cable (NYSE:TWC) released its Q3 2015 earnings report recently.  The company’s management stressed on the earnings call that the proposed Charter-Time Warner Cable (TWC) merger remains on track and the companies are working together to get the required regulatory approvals. Charter CEO Thomas Rutledge stated during Charter’s Q3 earnings call that the company has raised nearly all the financing required for the acquisition and he is expecting the deal to close by the first quarter next year. As for the quarter in question, the company’s pay-TV subscriber base continued to shrink. However, TWC has been able to slow down its pay-TV subscriber losses in recent quarters in part due to its triple play bundling packages and we believe that the trend will continue. In contrast, the company continues to acquire more high speed data subscribers, a trend driven by rising residential and business demand for high-speed data services.
Our price estimate for Time Warner Cable is $198, which implies a slight premium to the market price.
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Key Takeaways On The TWC-Charter Merger
In the earnings call, TWC management talked about how they are working very closely with Charter Communications (NASDAQ:CHTR) in order to obtain the required regulatory approvals for the proposed merger of the two companies.  The deal has received approval or authorization from most states as well as the shareholder nod from both companies.   Companies such as Netflix (NASDAQ:NFLX) and Cogent have also endorsed the merger. However, Dish Network (NASDAQ:DISH) recently petitioned the Federal Communications Commission (FCC) to reject the proposed merger.  Dish reasoned that the merger will result in a “suffocating duopoly”, where two broadband providers (Comcast and the Charter-Time Warner Cable combo) will control about 90% of the nation’s high-speed internet market. Dish believes that such a scenario would be a threat to online video, as the two companies will be able to put pressure on online video distributors (OVDs) with ease. AT&T (NYSE:T) has stated that it is not opposed to the merger, but it also wants a careful review of the deal’s impact on emerging online video products. 
The Charter-TWC deal is currently under review at the FCC and we believe that it will face fewer regulatory hurdles as compared to the now-defunct Comcast-TWC merger (see Our Thoughts On The Time Warner Cable-Charter Merger). Earlier in the year, the FCC granted approval to the DirecTV-AT&T (NYSE:T) merger, and we believe that the Charter-TWC combination will also be granted approval in time. Once the deal is approved, Charter could need to take on as much as $29.3 billion in additional debt in order to finance the transaction.  However, Charter CEO Rutledge spoke on the issue during Charter’s Q3 earnings call, stating that the company has raised nearly all the financing required for the acquisition.  He also stated that he is expecting the deal to close by the first quarter next year.
Pay-TV Subscriber Retention In 2015 Has Been The Best In Years
For cable companies in the U.S., the past several years have been tough as they have been experiencing significant challenges in retaining pay-TV subscribers. The industry is losing more video subscribers amid competition with telcos and the challenge of convincing younger consumers to pay for TV. The rise of alternate video platforms such as Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) is also hurting the cable companies. TWC’s fortunes have been no different, and the company’s subscriber base has declined consistently in the last few years. However, TWC has been able to slow the pace of decline in its subscriber base in recent quarters. The company’s pay-TV subscriber base shrank by 15,000 subscribers during the first half of 2015.  By comparison, TWC had lost 186,000 and 310,000 subscribers during the first six months of 2014 and 2013, respectively. The company continued this momentum and had its best third quarter since 2006, losing only 7,000 video subscribers. Much of the reduction in the pace of subscriber declines can be attributed to TWC’s strategy of triple play bundling. The company management has stated on a previous earnings call that 80% of the video subscriber base opt for the full bundle.  This bundling helps reduce the subscription fees for subscribers as it saves on infrastructure costs and leads to operational efficiencies and economies of scale. Looking ahead, we believe that Time Warner Cable will continue to lose pay-TV subscribers in the coming years, albeit at a reduced pace. Pay-TV revenues stood at $2.45 billion for the quarter, down 1.8% from the prior year quarter. 
High Speed Data Segment Continues To Grow
With the decline in the pay-TV industry, cable companies have been increasingly looking to their high-speed Internet businesses to drive growth. A growing need for speed and connectivity is fueling the demand for high-speed Internet in the United States. High-speed Internet penetration in the United States currently stands at 77% of all Internet connections.  In the long run we estimate high-speed Internet will penetrate over 90% U.S. homes, which leaves some decent room for growth. This will benefit the cable industry in particular, as it accounts for approximately 57% of the U.S. high-speed Internet market.  TWC continues to capitalize on this demand. In what was TWC’s best third quarter performance since 2006, the company’s high-speed data segment added 232,000 new subscribers and took its total subscriber tally to 12.39 million.  The growth in the subscriber base accompanied by a 2% increase in ARPU resulted in the segment’s residential revenues growing by 9.4% to $1.77 billion. 
View Interactive Institutional Research (Powered by Trefis):Notes:
- Time Warner Cable Reports 2015 Third-Quarter Results, October 29, 2015, Time Warner Cable Investor News [↩]
- Time Warner Cable (TWC) Robert D. Marcus on Q3 2015 Results – Earnings Call Transcript, October 29, 2015, Seeking Alpha [↩]
- Charter Communications (CHTR) Thomas M. Rutledge on Q3 2015 Results – Earnings Call Transcript, October 29, 2015, Seeking Alpha [↩] [↩]
- Time Warner Cable Stockholders Approve Merger with Charter Communications, September 21, 2015, BusinessWire [↩]
- DISH Petitions FCC to Deny Charter/Time Warner Cable Merger, October 13, 2015, Business Wire [↩]
- AT&T says not opposed to Charter-Time Warner deal, asks FCC for careful review, Oct 15, 2015, Reuters [↩]
- Time Warner Cable’s SEC Filings [↩] [↩] [↩] [↩] [↩]
- Time Warner Cable (TWC) Robert D. Marcus on Q2 2015 Results – Earnings Call Transcript, July 30, 2015, Seeking Alpha [↩]
- Akamai’s state of the internet Q2 2015 report, Akamai [↩]
- ABOUT 360,000 ADDED BROADBAND IN 2Q 2015, August 18, 2015, Leichtman Research Group [↩]