Our Long Term Projections Suggest Growth In Both Subscriber Base And ARPU For Time Warner Cable’s High-Speed Internet Business

Time Warner Cable (NYSE:TWC) has lost millions of pay-TV subscribers in the past few years. However, the company’s high-speed internet segment has experienced rapid growth in its subscriber base and revenues during the same period. This trend underscores 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 has led the growth charge in recent years. According to our estimates, Time Warner Cable’s high-speed internet operations constitute almost 47% of the company’s stock value. We expect the company’s high-speed internet business to continue to bring in more customers, while sustained growth in ARPU will translate into growth in segment EBITDA.  Accordingly, we estimate that high-speed internet EBITDA will grow from around $3.2 billion currently to $6.0 billion by the end of our forecast period and will account for around 48% of the company’s overall EBITDA.

Our price estimate for Time Warner Cable stands at $199, implying a premium of close to 8% to the market.

See our complete analysis for Time Warner Cable

Time Warner Cable’s High-Speed Internet Subscriber Base Will Continue To Grow

The increasing need for speed and connectivity is driving high-speed internet growth in the United States. The higher penetration of smartphones and use of multiple devices are also aiding overall growth. Resultantly, Time Warner Cable has seen rapid high-speed internet subscriber growth over the past few years. The company’s subscriber base has increased from less than 8 million subscribers in 2007 to around 12.4 million by end of the third quarter this year. ^[1] Internet video, video-on-demand and online gaming account for the majority of Internet traffic in the country. These activities require high data volume, which explains why the reliance on fixed networks is relatively greater than that on mobile carriers. Moreover, the traditional boundaries between cable service providers and telecoms are getting blurred and all operators are looking to bundle video, high-speed internet and voice services together. Customers tend to prefer receiving all their services from a single provider. As they receive a single bill for all services, this works out to be both cost-effective and more convenient to them.

The overall industry (17 high-speed internet service providers representing 94% of the total market) added more than 2 million net high-speed internet subscribers during the first nine months of 2015, taking the total subscriber base to 89.5 million. ^[2] We believe that high-speed internet penetration in the United States has enough room to grow in the coming years. Around 77% of households with Internet service at home have a high-speed internet connection as of the second quarter of 2015. ^[3] We estimate that this figure will increase to around 90% in the long run. We believe that a sustained increase in high speed internet penetration will continue to drive growth for cable operators in the coming years. As a result, we estimate that Time Warner Cable’s high-speed internet subscribers will grow to 16.7 million by 2022.

Continued Increase In ARPU Will Lead To EBITDA Growth

Time Warner Cable’s high-speed internet revenues have more than doubled from $3.7 billion in 2007 to $7.8 billion in 2014 and the segment now accounts for more than 36% of the company’s overall revenues. ^[4] The increase in revenues is partly due to the growth in the average monthly revenue per user (ARPU) for high-speed internet services segment. The segment ARPU has increased from $40 in 2009 to over $54 in 2014. We expect this trend to continue in the coming years and forecast ARPU to be just shy of $80 by the end of our forecast period. This growth will primarily be driven by the rising demand for higher priced tiers with higher speeds. This demand for higher speeds is due to the spike in consumption of online video streaming and gaming services. Moreover, the rapid growth in Time Warner Cable’s business services is driving the ARPU upwards. Given these factors, we estimate that high-speed internet EBITDA will reach $6 billion by the end of our forecast period and will account for 48% of the company’s overall EBITDA.

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1. Time Warner Cable’s SEC Filings [↩]
2. ABOUT 645,000 ADD BROADBAND IN THE THIRD QUARTER OF 2015, November 17, 2015, Leichtman Research Group [↩]
3. Akamai’s state of the internet Q2 2015 report, Akamai [↩]
4. Time Warner Cable’s SEC Filings [↩]