Time Warner Cable’s Pay-TV Business Shrinks But Broadband Is Firm

Time Warner Cable (NYSE:TWC) recently reported its Q2 2013 earnings. The revenues grew by 3% to $5.5 billion, led by 15% revenue growth in the broadband business. The company lost 191,000 pay-TV subscribers in the quarter. The growth in broadband was driven by the continued demand for high-speed data services. However, the pay-TV subscriptions continued to decline at a higher rate while its peer Comcast (NASDAQ:CMCSA) has been able to slow its subscriber losses (See – Comcast Posts Solid Results As Broadband And NBCU Lead The Growth).

The company’s video programming costs grew due to contractual rate increases and fees associated with carrying new networks. Going forward, the company should continue to see robust growth in its residential services driven by the broadband business. The stock has climbed 20% so far this year, which is partly due to the speculation over a merger with Charter Communications.

See our complete analysis for Time Warner Cable

Broadband Business Continues To Grow

Time Warner Cable’s broadband revenue for the quarter ended June 30, 2013 grew by 15% to $1.42 billion due to 9.4% growth in ARPU (average revenue per subscriber) and an increase in the number of subscribers. ^[1] The company added 8,000 broadband subscribers as compared to 59,000 it added a year earlier. The higher ARPU was primarily due to an increase in equipment rental charges and a greater percentage of subscribers purchasing higher-priced tiers of service. Time Warner Cable has been rebranding itself as a major broadband provider and is aggressively penetrating in the commercial business segment which was visible in the quarterly results as revenues for the business services increased by 22%. Going forward, we believe the broadband business will continue to drive growth for the company. The boom in demand for broadband in the U.S. can be primarily attributed to a resurgent housing market and stronger economy, along with the growing need for speed and connectivity. We expect this trend to continue due to the higher penetration of smartphones and increased use of multiple devices.

Pay-TV Business Bleeds Subs

It was another disappointing quarter for the company’s pay-TV business as it continued to bleed and lost 191,000 subscribers as compared to the last quarter. If we compare the loss from the same period previous year, the company has lost 579,000 pay-TV subscribers. Higher competition and the availability of online video streaming from Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) have put immense pressure on the traditional pay-TV operators. Moreover, in recent years the cable companies have lost many of their subscribers to satellite and telcos.

However, companies like Comcast have been aggressively addressing the issue of customer churn and it has managed to bring down its subscriber losses by providing additional features and services including Xfinity and X1. Time Warner Cable is now following an approach to pursue subscribers with higher ARPU, higher profit and lower churn even if that means fewer connects. ^[2] In order to provide additional services to its subscribers, the company recently made an unsuccessful attempt to get a stake in online streaming provider Hulu, as the sale was called off by its owners (Read – A Setback For DirecTV As Hulu Owners Once Again Abandon Sale). The company is already battling with CBS over retransmission rights and has stopped the transmission of CBS channels. CBS content is very popular and this blackout is going to add to the woes of Time Warner Cable in a time when it is already facing huge subscriber losses. Going forward, it will be interesting to see how both the companies reach to a negotiation and finally end the blackout.

We are currently in the process of updating our model for Time Warner Cable in view of the recent earnings.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Time Warner Cable’s SEC Filings [↩]
2. Time Warner Cable Management Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, Aug 1, 2013 [↩]