Time Warner Cable Posts Strong Subscriber Numbers For 2014

Time Warner Cable (NYSE:TWC) reported its fourth quarter and full year earnings on January 29th. The subscriber numbers were very positive for the company. The company added 180,000 high-speed data subscribers in Q4 2014 to take its subscriber tally to 12.25 million subscribers at the end of the year. The full year increase to the subscriber base was 657,000 as compared to 211,000 in 2013. The company also lost fewer Pay-TV subscribers in 2014 as compared to the previous year. ^[1]

Time Warner Cable’s overall revenues increased by 3.1% to $22.8 billion for the full year. The company’s business services segment continued to outperform with 23% 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 28%, primarily due to the company’s investments in improving network reliability, upgrading older equipment and expanding its network. ^[1]

Time Warner Cable also expects its merger with Comcast (NASDAQ:CMCSA) to close early this year. ^[2] Both companies had earlier demonstrated their commitment to the merger by agreeing to push the end date of the merger six months ahead to August 12, 2015. ^[3] This step was taken because the regulatory approvals required for the merger are still pending.

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Pay-TV Business Reduces The Rate Of Decline In Its Subscriber Base

We estimate that the Pay-TV business contributes close to 40% of Time Warner Cable’s stock value. Pay-TV revenues declined in 2014 by 4% to $10.37 billion as compared to the prior year. This can be attributed to a decline of 408,000 video subscribers, taking the total subscriber base to 10.79 million. ^[1] Even though the subscribers continue to decline, 2014 was a marked improvement as compared to 2013 when the company lost 833,000 customers amid a dispute with CBS Corporation (NYSE:CBS). Pay-TV ARPU for the full year also improved to $75.85 from $74.90 in the prior year.

As a result of weaker Pay-TV numbers, overall residential services segment EBITDA declined marginally by $65 million to $8.62 billion. While Time Warner Cable is not the only Pay-TV operator losing video subscribers amid fierce competition in a saturated market, the pace of decline for the company 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 it will be interesting to see if it can maintain this trend. This task will be extremely difficult as rising 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. ^[4] More and more people are embracing lower cost options, including free programming and online video services such as Hulu, Netflix and Amazon Prime.

High speed Data Continues On its Merry Way

We estimate that high-speed data segment contributes close to 40% to Time Warner Cable’s stock value. The segment’s residential revenues increased by 7.4% to $1.64 billion while its business services revenues jumped 23% to $361 million during the fourth quarter. For the full year, the segment’s residential and business services revenues grew by 10.4% and 22.0%, respectively. This can be attributed to continued growth both in ARPU and the subscriber base. The ARPU for residential high-speed data segment increased approximately 7% to $46.95 in 2014.

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. ^[5] 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. ^[6]

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1. Time Warner Cable’s SEC Filings [↩] [↩] [↩]
2. Time Warner Cable’s (TWC) CEO Rob Marcus on Q4 2014 Results – Earnings Call Transcript, January 29, 2015, Seeking Alpha [↩]
3. Comcast/TWC Extend Merger End Date to August, January 30, 2015, Comcast/TWC Extend Merger End Date to August [↩]
4. Pay TV’s New Worry: ‘Shaving’ the Cord, Oct 9, 2014, The Wall Street Journal [↩]
5. The State of the Internet, Akamai [↩]
6. ABOUT 700,000 ADD BROADBAND IN THE THIRD QUARTER OF 2014, November 18, 2014, Leichtman Research Group [↩]