Time Warner Cable Q3 Preview: Broadband And Pay-TV Subscriber Trends In Focus

Time Warner Cable (NYSE:TWC) will release its third quarter earnings report on October 29th. ^[1] We expect the company’s pay-TV subscriber base to continue to shrink in the near term. However, Time Warner Cable has been able to slow down its pay-TV subscriber losses in previous quarters in part due to its triple play bundling packages and we believe that the trend will continue. In contrast, we expect steady growth in the high-speed data operations driven by rising residential and business demand for high-speed data services. Our expectations are in accordance with the changing complexion of Time Warner Cable’s 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.

Our price estimate for Time Warner Cable is $198, which implies a 5% premium to the market price.

See our complete analysis for Time Warner Cable

High Speed Data Segment Will Lead Growth For Time Warner Cable

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 the higher penetration of smartphones together are aiding the overall demand for high-speed Internet. Smartphone penetration has seen rapid growth from 54% in December 2012 to 77% in August 2015. Internet video, video-on-demand and online gaming account for the majority of Internet traffic in the United States. Video streaming, for instance, requires high data volumes which explains why the reliance on fixed networks is far greater than that on mobile carriers.

As a result of the strong demand for high-speed internet, Time Warner Cable has seen rapid growth in its high speed data segment in recent years, with the subscriber base growing from less than 8 million in 2007 to 12.77 million by the end of Q2 2015. ^[2] Subscriber growth has been especially strong during the first half of 2015. The company added 315,000 high-speed data subscribers during Q1 2015 in what was the company’s best quarter in terms of subscriber additions since Q1 2007. Time Warner Cable continued the strong performance during the second quarter and added 172,000 new subscribers, its strongest second quarter showing since 2008. We expect Time Warner Cable to continue to gain high speed data subscribers throughout our forecast period, growing its market share of the high-speed internet market from 12.8% in 2014 to just over 14% by the end of 2022.

Pay-TV Segment Will Continue To Lose Subscribers, Albeit At A Reduced Pace

The pay-TV industry has been losing subscribers for the past few years due to a combination of factors, including market saturation, fierce competition amongst cable companies, and the rise of cheaper alternative platforms such as Netflix (NYSE:NFLX), Hulu, etc. Time Warner Cable has also experienced a similar trend and its pay-TV subscriber base has come down from 13.3 million in 2007 to less than 11 million by the end of Q2 2015. ^[2] However, the company has been able to slow the pace of decline in its subscriber base in the recent past. 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 actually added 30,000 subscribers during Q1 2015, the first instance of quarterly growth in the subscriber base since 2009. ^[3] In its best second quarter performance since 2008, Time Warner Cable only lost 45,000 pay-TV subscribers during Q2 2015, a marked improvement over the 152,000 and 191,000 subscribers it lost during Q2 2014 and Q2 2013 respectively. ^[3]

We believe that the reduction in the pace of subscriber decline is driven in part by Time Warner Cable’s strategy of triple play bundling. Triple play bundling is the combining of the three services offered by the company — pay-TV, high speed data 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. Looking ahead, we believe that Time Warner Cable will continue to lose pay-TV subscribers in the coming years, albeit at a slower pace. Consequently, we believe that Time Warner Cable’s market share of the pay-TV market will decrease from 11% in 2014 to around 9.7% by 2022.

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1. Time Warner Cable to Report 2015 Third-Quarter Results, October 6, 2015, Time Warner Cable Investor News [↩]
2. Time Warner Cable’s SEC Filings [↩] [↩] [↩]
3. Time Warner Cable’s SEC Filings [↩] [↩]