TWC: Q3 earnings miss, but new OTT plays bode well for Broadband biz

Time Warner Cable missed both revenue and earnings in the third quarter, as programming costs increased, revenue from residential video declined and subscriber defections continued.

Nevertheless, the company said it was on track to be acquired by Comcast “sometime in the early 2015,” pending regulatory approval.

There were bright spots in the quarter:

High-speed data subscribers grew, as did HSD revenue.

TWC continued building out its MAX high-speed Internet offering, which is now available in New York and LA, and will soon be operational in Austin. The product has been well received, CEO Rob Marcus told analysts during a morning call, and he expects it will reduce churn as well.

The company added 92,000 subscribers to its Broadband business, and has added 428,000 subscribers to the HSD service in the first nine months of the year, a trend, Marcus said that reached back to 2012.

Still, Time Warner Cable continued to bleed video subscribers in the quarter, losing 184,000 customers to end the quarter with 10.82 million subscribers. Thus far in 2014, TWC has lost 370,000 video customers… far better than the 616,000 it lost through the first nine months of 2013 following a retransmission fee dispute it had with CBS for much of the summer.

Marcus said recent announcements from CBS and HBO that they would be offering over-the-top products are welcome to the cable operator.

“For a long time, we’ve been advocating for a greater degree of flexibility in how we deliver video to the customer,” Marcus said. “To the extent that last week’s announcements reflect an increased willingness of programmers to be flexible, we’re pleased.

“OTT is the killer app for high-speed data. These new offerings can only increase demand for our HSD product. Net-net, I’m intrigued by the offerings.”

Marcus said TWC had no intention of using data caps to extract more revenue. He noted that TWC currently offers two tiers of Broadband service, a 30 GB per month version and a pricier unlimited version that, he said, has been far more popular among consumers.

“Our median usage is in the 35 GB per month range,” Marcus said. “Not many customers subscribe to the 30 GB service, that’s the value they place on unlimited usage.”

And, Marcus said, while TWC hasn’t “thrown in the towel on the video business,” the company is “very bullish on the HSD business and think we can continue to grow it.”

Marcus said the high-speed data business has been growing rapidly for the past two years, and said “it’s only going to continue to grow.”

TWC added 433,000 Broadband customers in 2012, 154,000 in 2013, and has so far added 428,000 Broadband subscribers in the first three quarters of 2014.

The video business, in contrast, has lost 1.74 million subs over the same period.

The trend of increased OTT, simplified bundles and “skinny” offerings from service providers are trends he expects to continue and to grow.

“It’s hard to believe that things will stay status quo,” he said.

Marcus also said he expects Ultra HD, or 4K , offerings to become more common, and added that TWC has been improving its network to be able to deliver whatever comes down the pipe.

“It’s hard to know exactly how 4K will take hold, but customers do have an insatiable appetite for better pictures and better sound,” he said. “We’ll make sure our network will be able to deliver whatever format is available.

“We expect to see a far greater amount of 4K than we’re currently seeing,” he added.

By the numbers:

  • TWC reported EPS of $1.86, missing Wall Street estimated by 5 cents.
  • Revenue of $5.71 billion increased 3.4% Y/Y, but missed estimates by $40 million.
  • TWC said residential video revenue fell 4% Y/Y to $2.497 billion.
  • Residential high-speed data revenue rose10.9% to $1.62 billion.
  • Programming and content costs were up 9.6% to $1.326 billion, raising average monthly programming costs per residential video subscriber by11.1% to $38.96.
  • Total customer relationships declined 18,000 in the quarter to 14.46 million.
  • Triple play customers, an extremely valuable customer segment dropped 24,000 in the quarter.
  • Operating income declined $9 million Y/Y to $1.15 billion.
  • Second generation cloud-based guide is in customer homes. Better VOD usage with new guides.

Stay tuned.

Jim O’Neill is Editor of Videomind and Principal Analyst at Brightcove. You can follow him on Twitter @JimONeillMedia and on LinkedIn