Time Warner Cable Q4 Review: High-Speed Data Leads Growth, Pay-TV Segment Experiences First Annual Subscriber Increase Since 2006

Time Warner Cable (NYSE:TWC) released its fourth quarter and full-year 2015 earnings report recently. ^[1] The company bucked the annual trend of losing pay-TV subscribers and was able to add 32,000 new subscribers in 2015, in part due to its triple play bundling packages. Even though we believe that Time Warner Cable (TWC) will eventually go back to losing pay-TV subscribers in the coming quarters, the company will do so at a slower pace as compared to its peers, such as Dish Network (NASDAQ:DISH) and Comcast (NASDAQ:CMCSA). In contrast, we expect the steady growth that TWC is currently experiencing in its high-speed data operations will continue throughout our forecast period, driven by rising residential and business demand for high-speed data services. Additionally, the company management stated on the earnings call that the proposed Charter-TWC merger remains on track and the companies are working together to get the required regulatory approvals.

Our price estimate for Time Warner Cable stands at $199, implying a premium of more than 10% to the market.

See our complete analysis for Time Warner Cable

TWC Registers First Full Year Pay-TV Subscriber Base Increase In Nine Years

Subscriber retention has been extremely difficult for U.S. cable companies for the past several years. The cable-TV industry is losing more video subscribers amid competition with telcos and the challenge of convincing younger consumers to pay for TV. Also, the increase in the cord-cutting phenomenon due to the rise of alternate video platforms, such as Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN), is hurting the cable companies. TWC has also faced similar retention issues and the company’s subscriber base has declined consistently in the last few years. However, TWC has been able to stem the decline in its subscriber base in the recent past. Time Warner Cable actually added 32,000 subscribers during 2015, the first instance of annual growth since 2006. ^[2] The company’s 2015 performance is a marked improvement over its performance in previous years, when it lost 408,000 and 833,000 subscribers during 2014 and 2013, respectively. ^[3]

Much of the reduction in the pace of subscriber decline 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. ^[4] 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 eventually go back to losing pay-TV subscribers in the coming years, albeit at a slower pace as compared to its peers such as Dish and Comcast. Pay-TV revenues for the full year stood at $9.9 billion, down 1% from the prior year. ^[3]

Growth In High speed Data Subscriber Base & Revenues

In what was a record full-year subscriber performance, the company’s high-speed data segment added 1 million new subscribers and took its total residential subscriber tally to 12.68 million. ^[3] The growth in the subscriber base accompanied by a 2.5% increase in ARPU resulted in the segment’s residential revenues growing by 9.3% to $6.4 billion. ^[3] With the decline in the pay-TV industry, Cable companies have looked upon their high-speed internet businesses to drive growth in the recent past. 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 around 80% of all internet connections. ^[5] In the long run we estimate high-speed internet will penetrate over 95% U.S. homes, which leaves enough 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. ^[6] We believe that TWC will continue to capitalize on this demand for high-speed internet. Resultantly, we expect the company 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 14.5% by the end of 2022.

TWC-Charter Merger On Track To Be Approved By FCC

In the earnings call, TWC management talked briefly about the merger with Charter Communications (NASDAQ:CHTR), stating that “the integration planning and regulatory review processes continue to move forward.” ^[7] The deal has received approval or authorization from most states as well as the shareholder nod from both companies. ^{[8] [9]} The Charter-TWC deal is currently under review by the FCC and a number of companies have already expressed their opinion on the merger. Dish Network and Time Warner (NYSE:TWX) are opposed to the merger as they believe that the merger will be detrimental to the development of online video distributors (OVD’s) and ‘over the top’ services. ^{[10] [11]} Dish and Time Warner’s views are in total contrast to those of interconnectors such as Netflix (NASDAQ:NFLX) and Cogent, which have endorsed the merger. AT&T (NYSE:T) has also made its stance clear, stating 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. ^[12] We believe that the proposed merger will be granted approval by the FCC, although the companies might not be able to close the transaction as per the earlier intended timeline of Q1 2016. ^[8]

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1. Time Warner Cable Reports 2015 Fourth-Quarter and Full-Year Results, January 28, 2015, Time Warner Cable Investor News [↩]
2. Time Warner Cable Delivers Its Best Full-Year Residential Subscriber Growth Ever, January 04, 2016, Business Wire [↩]
3. Time Warner Cable’s SEC Filings [↩] [↩] [↩] [↩]
4. Time Warner Cable (TWC) Robert D. Marcus on Q2 2015 Results – Earnings Call Transcript, July 30, 2015, Seeking Alpha [↩]
5. Akamai’s state of the internet Q3 2015 report, Akamai [↩]
6. ABOUT 360,000 ADDED BROADBAND IN 2Q 2015, August 18, 2015, Leichtman Research Group [↩]
7. Time Warner Cable’s (TWC) CEO Rob Marcus on Q4 2015 Results – Earnings Call Transcript, January 28, 2015, Seeking Alpha [↩]
8. Charter Communications (CHTR) Thomas M. Rutledge on Q3 2015 Results – Earnings Call Transcript, October 29, 2015, Seeking Alpha [↩] [↩]
9. Time Warner Cable Stockholders Approve Merger with Charter Communications, September 21, 2015, BusinessWire [↩]
10. DISH Petitions FCC to Deny Charter/Time Warner Cable Merger, October 13, 2015, Business Wire [↩]
11. HBO Joins Dish In Warning Over Charter, TWC Merger, January 15, 2016, Investors.com [↩]
12. AT&T says not opposed to Charter-Time Warner deal, asks FCC for careful review, Oct 15, 2015, Reuters [↩]