Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 4Q15 Earnings Update
Prev. Ed.: Nov 16, 2015; 3Q15 Earnings Update(share price and brokers’ material are as ofAug 05, 2015)
Brokers’ Recommendations: Positive: 35.3% (6analysts); Neutral: 58.8% (10); Negative: 5.9% (1) Prev. Ed.: 7; 10;1
Brokers’ Target Price: $198(↓$4.13 from the last edition; 14firms) Brokers’ Avg. Expected Return: (7.9%)
*Note: Although datedFeb11, 2016, brokers’ material is as ofFeb 04, 2016.
Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers’ than in the Valuation table.
Executive Summary
Time Warner Cable (TWC or the company) is the second-largest cable operator in the United States and offers entertainment and communication services to its customers.The company owns and operates cable systems located mainly in five regional clusters–New YorkState, the Carolinas, Ohio, southern California, and Texas.
Key factors for evaluating an investment strategy for TWC are as follows:
- TWC is the second-largest cable operator in the United States after Comcast (CMCSA).
- TWC boasts a huge subscriber base.
- Some of its main competitors are Comcast,DirecTV (DTV) and EchoStar (SATS).
Of the 17firmscovering the stock,6 conferred positive ratings, 10 rendered neutral ratings while the remaining firm assigneda negative rating to the stock. Target prices provided by the firms range from $161 to $224, with the average at $198. The analysts expect a return of 7.9% from the stock at the current price.
Positive outlook (6firms or 35.3%) – The impending merger with Charter Communications, improving subscriber trends, reduction in churn rate, impressive performance by its high-speed data and business services, the success of the TWC TV App, robust free cash flow (FCF) generation, attractive valuation,ARPU growth, extensive product portfolio, improving industry pricing trends and better returns on capital to shareholders via share repurchases and dividend payouts make the analysts optimistic about Time Warner Cable. Additionally, the analysts believe that TWC has significant growth opportunities from the improving cable sector trends.
Neutral outlook (10firms or 58.8%)– Though these analysts areoptimistic about the company’s latest strategies and deals, they expect these initiatives to take time to deliver favorable results. They believe that the stock is fairly valued at current levels and also prefer to remain on the sidelines mainly based on a declining number of residential video subscribers, a competitive pay-TV market and mounting programming costs.
Negative outlook (1 firm or 5.9%) – The analysts with a bearish stance believe that stiff competition from cable and telecom players, mounting programming expenses and a highly leveraged balance sheet will continue to impede growth at the company.
Feb 12, 2016
Overview
The firms identified the following issues as critical for evaluating the investment merits of TWC:
Key Positive Arguments / Key Negative ArgumentsTechnological Leadership: TWC has a long history of leadership within the industry and has led the way for technical innovation through the use of fiber optics to improve and expand its cable products and services. / Competition: TWC faces stiff competition in the cable industry from satellite broadcasters like DirecTV and EchoStar. The competition will intensify as more telecom companies start rolling out their satellite TV plans. Moreover, the channel companies are supplying their content at cheap rates, which will further exert pressure on pay-TV industries.
Financial condition and Liquidity: Management believes that the cash generated by TWC or the cash available to TWC, is sufficient to fund its capital and liquidity needs in the foreseeable future. / Weakening Economic Conditions: TWC’s subscriber growth remains affected by a deteriorating economy, the downturn in the housing market and higher unemployment rates.
Spin-off: Separation of TWC from TWX has been in the best interests of the TWC shareholders. The completion of thespin-off has given TWC the autonomy to operate its business that it lacked previously, by virtue of the fact that TWX owned a controlling interest in TWC. / Heavy Dependence on network and information systems: TWC relies on network and information systems and other technologies, and a disruption or failure of such networks, as a result of computer viruses, misappropriation of data or other malfeasance, as well as natural disasters, accidental releases of information or similar events, may disrupt TWC’s business.
Dividend and Share Buyback: TWC is focused on improving shareholders’ return. / Higher Programming Cost: Continuous increase in programming cost by the broadcasting companies may pressurize TWC’s margins.
Agreement with Verizon:The agreement with Verizon (VZ) and other cable companies like TWC, Comcast Corp. (CMCSA) and Bright House Networks will allow each other to sell their products on a wholesale basis from each others’ outlets, thereby mitigating stiff competition with Verizon’s FiOS TV subscribers and also driving subscriber growth. Furthermore, TWC will also have an option of including the wireless service of Verizon in its portfolio in the near future. / Saturated Market: TheU.S. pay-TV market is gradually moving toward saturation. Moreover, the deployment of AT&T’s (T) U-Verse and Verizon‘s (VZ) Fios TV will further saturate the market.
Market expansion through acquisition: Acquisition of NaviSite and NewWave as well as the completion of the Insight acquisition will establish a strong foothold for the company, going forward. / Integration Risk: Continuous acquisitions may lead to integration risk for the company.
Headquartered in New York, Time Warner Cable Inc. (TWC or the company) is the second-largest cable operator in the U.S., with technologically advanced, well-clustered systems located mainly in five regional areas — New York State (including New York City), the Carolinas, Ohio, southern California (including Los Angeles) and Texas. TWC provides video, data, and voice services to residential and commercial
customers in the United States. The company offers video service through analog transmissions; a combination of digital and analog transmissions; or in systems, as well as video service via digital transmissions. It provides on-demand services, enhanced television services, high-definition television, and set-top boxes equipped with digital video recorders. Time Warner Cable also offers video programming; data services, including Internet access, website hosting, and managed security; and Business Class Phone, a business-grade phone service geared to small-and medium-sized businesses, as well as commercial networking and transport services.
More information on the company is available at its website:
Note: Time Warner Cable Inc.’s fiscal year coincides with the calendar year.
Feb 12, 2016
Long-Term Growth
Time Warner Cable’s network gives it a modest edge over its peers, particularly when it comes tothe rollout of switched digital Switched Digital Video (SDV).The companyhas completed the rollout of its DOCSIS 3.0 wideband Internet service. Wideband enables 50 Mbps download capacity, a quantum leap over legacy speeds of 6–10 Mbps, and is particularly important for the company's commercial services offering, which includes digital phone, data and video services.
In May 2015, Charter Communications reached an agreement to buy Time Warner Cable. The total value of the deal stands at $78.7 billion, including debt. Taking into account Time Warner Cable's diluted shares outstanding as of Mar 31, the stock portion of the deal has been pegged at $55.76 billion. Also, Charter will take over Bright House –the sixth largest U.S. cable operator– for $10.4 billion. However, the Charter-Time Warner Cable deal is currently under scrutiny by regulator Federal Communications Commission. Together the merged entity of Charter Communications, Time Warner Cable and Bright House will serve 23.9 million customers across 41 states. If approved, the deal will most likely help Time Warner Cable regain lost ground as it is getting gradually marginalized by fiber-based video offerings of telecom giants and online video streaming services of low-cost operators.
Time Warner Cable has also completed the acquisition of DukeNet Communications LLC, for $600 million in cash. DukeNet has an extensive fiber-optic network of more than 8,700 miles across North and South Carolina and five other states in southeastern U.S. DukeNet offers data and high-capacity bandwidth services to wireless service providers, data centers, government and enterprise customers. Hence, we believe the successful integration of DukeNet, coupled with increased political ad spending, will not only strengthen the Business Service division of Time Warner Cable but will also help it achieve the target of $5 billion in revenues by 2018.
Over the last 3–4 years, the internal dynamics of the U.S. pay-TV industry have been gradually shifting from cable TV operators to large telecom operators and low-cost over-the-top service providers. An extensive network of fiber-based video services from telecom operators and the strong presence of online video streaming providers like Netflix Inc., Hulu.com, YouTube etc., pose severe threat to cable-TV operators. This online video streaming business model is gaining momentum, especially amid the ongoing economic uncertainties. This growing trend may affect the company’s subscriber growth, going forward.
Meanwhile, the Business Services segment has emerged as a major growth driver for Time Warner Cable, benefiting significantly from the rollout of TWC Maxx. The small and mid-sized business (SMB) segment has become a huge growth opportunity for the cable TV industry. Various industry researchers estimate that the SMB segment is expected to offer a $20 billion to $30 billion market opportunity.
Time Warner Cable has decided to undertake extensive investmentsin the next five years by differentiating its product portfolio from its competitors.These investments will not only enhance its product features but also boost top-line growth by creating separate revenue channels like the cloud computing and the IntelligentHome service.
Feb 12, 2016
Target Price/Valuation
Provided below is a summary of valuation and ratings as compiled by Zacks Research Digest:
Rating DistributionPositive / 35.3%↓
Neutral / 58.8%↑
Negative / 5.9%↓
High / $224↑
Low / $161↓
Avg. Target Price / $198↓
No. of the analysts with the target price/Total / 14/17
Primary risks to achieving the target price includeuncertainty of regulatory approval for the Comcast merger, programming cost putting pressure on cable margins, highly competitive consumer video and broadband markets, presence of low-cost online video streaming providers, cord-cutting, sensitivity to economic factors and regulatory risks.
Nov 12, 2016
Recent Events
On Jan 28, 2016, TWC announced its 4Q15 financial results.Key highlights areas follows:
- Total revenuegrossed $6,072 million, up 4.9% year over year (y/y)and ahead of the Zacks Consensus Estimateof $6,034 million.
- OIBDA was $2,132 million, down0.4% y/y.
- Pro forma EPS was$1.80versus $1.96 in 4Q14.However, adjusted EPS of $1.80 outpaced the Zacks Consensus Estimateof $1.79.
Time Warner Cable-Charter Deal Wins Shareholders' Nod – Sep 21, 2015: Time Warner Cable and Charter Communications recently announced that the shareholders of both the companies have approved all proposals associated with the pending merger, casting more than 99% votes in favor of it. Both the companies are now waiting for a go-ahead from the Federal Communications Commission (FCC).
May 8, 2015
Revenue
Provided below is a summary of total revenue as compiled by Zacks Digest:
*
Revenue ($ in M) / 4Q14A / 3Q14A / FY14A / 1Q15A / 2Q15A / 3Q15 / 4Q15A / FY15A / FY16E / FY17EZacks Consensus / $5,714.0 / $22,812.0 / $6,072.0 / $23,666.0
Digest High / $5,714.0 / $5,714.0 / $22,812.0 / $5,777.0 / $5,926.0 / $5,922 / $6,072.0 / $23,679.0 / $25,322.0↑ / $26,938.0 ↓
Digest Low / $5,726.0 / $5,714.0 / $22,812.0 / $5,777.0 / $5,926.0 / $5,922 / $6,072.0 / $23,635.0 / $25,134.0↑ / $26,489.4 ↓
YoY Growth / 3.2% / 3.6% / 3.1% / 3.5% / 3.5% / 3.6% / 4.9% / 3.9% / 6.6%↑ / 5.6%
QoQ Growth / 2.6% / -0.2% / -0.2% / 2.6% / -0.1% / 2.5% / 3.7%
*Note: Blank cells indicate the analysts did not provide any numbers
As per the company press release and the Zacks Digest model, total revenue came in at $6,072 million in 4Q15, up 4.9% y/y and 2.5% quarter over quarter (q/q). Strong residential high-speed data revenue growth and robust revenue growth atthe Business Services segment were offset by weak advertising revenue growth.
Provided below is a summary of segment revenue as compiled by Zacks Digest:
Revenue ($ in M) / 4Q14A / 2014A / 1Q15A / 2Q15A / 3Q15A / 4Q15 / FY15A / FY16E / FY17EResidential Service / $4,615.0 / $18,446.0 / $4,662.0 / $4,758.0 / $4,735.0 / $4,811.0 / $18,966.0 / $19,910.6 / $20,944.6
Business Service / $724.0 / $2,838.0 / $781.0 / $803.0 / $836.0 / $836.0 / $3,284.0 / $3,762.5 / $4,193.4
Advertising / $276.0 / $1,127.0 / $230.0 / $263.0 / $251.0 / $251.0 / $1,028.0 / $1,163.7 / $1,090.5
Other / $99.0 / $401.0 / $104.0 / $102.0 / $100.0 / $113.0 / $419.5 / $435.9 / $443.0
Total Revenue / $5,714.0 / $22,812.0 / $5,777.0 / $5,926.0 / $5,922.0 / $6,072.0 / $18,966.0 / $19,910.6 / $20,944.6
*Note: Blank cells indicate the analysts did not provide any numbers
Segment Revenues:
Total Residential Service Revenues (79.2% of total 4Q15 revenue)
As per the Zacks Digest model,total residential servicerevenue was $4,811.0 million in 4Q15, up4.6% y/y and down 1.6% q/q.
Within the segment, video revenues totaled $2,471.0 million, up0.3% y/yand 0.7% q/q. High-speed data revenues grossed $1,819.0 million, up 10.6% y/y and 2.7% q/q. Voice revenues were$497.0 million, up5.7% y/yand2.9% q/q. Other revenues reached $24.0 million, up 4.8% y/y but down11.1% q/q.
Total Business Service Revenue (14.2%)
As per the Zacks Digest model,total business servicerevenuestotaled$864 million in the reported quarter, up 14.4% y/y and 3.3% q/q.The strong year-over-year growth in business servicerevenues was attributable to higher high-speed data and voice subscribers, organic growth in cell tower backhaul revenues and revenues from DukeNet.
Within the segment, video revenues amounted to $99 million, up 6.5% y/yand 2.1%q/q. High-speed data revenues of $430million were up 19.1% y/yand 4.4% q/q. Voice revenues came in at $157 million, up 13.8% y/y and 2.6% q/q. Wholesale transport revenues were $128 million, up 14.3% y/yand4.9% q/q. Other revenues were $50 million, down 2.0% y/y and 3.8%q/q.
Advertising Revenues (4.7%)
As per the Zacks Digest model,advertising revenues were$284 million in 4Q15, down14.5% y/y but up 13.1% q/q.
Other Revenues(1.9%)
As per the Zacks Digest model,Other revenues reached $113 million in 4Q15, up10.7% y/ybut down12.6%q/q.
Subscriber Statistics
Residential Segment
In fourth-quarter 2015, video subscriber count decreased by 54,000 to 10.821 million. High-speed data subscribers rose by 281,000 to 12.675 million. Voice subscriber tally increased 227,000 to 6.320 million. Single-play added 43,000 to reach 5.752 million while double-play subscribers lost 48,000 to end up at4.067 million. The triple-play customer base added 205,000, taking its total count to 5.310 million.
Business Segment
In fourth-quarter 2015, video subscriber count increased by 4,000 to 214,000. High-speed data subscribers rose by 16,000 to 638,000. Voice subscriber tally went up 12,000 to 375,000. Single-play subscribers increased 6,000 to 362,000 while double-play subscribers added 10,000 to reach 305,000. The triple-play customer base added 2,000, taking the total count to 85,000.
Outlook
TWC has adopted a four-fold strategy, which includes concentrating on higher ARPU generating subscribers, improving world class products, product reliability and customer experience, and finally delivering cost efficient services. Moreover, successful integration of DukeNet will not only strengthen the Business Service division of Time Warner Cable but will also help the company achieve the target of $5 billion in revenues by 2018.
The analysts believe that the company stands to benefit from its impending merger with Charter Communications, which should help the company regain its competitive position amid the fiber-based video offerings of telecom giants and online video streaming services of low-cost operators. The firms believe that the combined companies can add to shareholder value on the back of potential cost savings.
TWC continues to spend in its Business services segment, in order to exploit the growing opportunities, which is showing no signs of slowing. Furthermore, revenue from Business services is also helping mitigate increasing programming costs. Management has also pointed out that disconnect rates are slowly declining in FiOS and U-Verse areas, implying longevity in the recent subscriber momentum.
According to some analysts, TWC’s top line will benefit largely from its business service segment mainly attributable to the rollout of TWC Max. Moreover, growing demand for cloud service offerings coupled with the acquisition of DukeNet will further lend support to step up high-speed data revenue growth and boost business revenues, going forward. Also, the addition of NBC Universal’s Sports, News and Entertainment Programming to its TV Everywhere application and a paid interconnection deal with Netflix Inc. should improve the quality of services offered, reduce churn rate and augment average revenue per user in the coming quarters.
Time Warner Cable has been persistently losing video customers despite implementing several business-oriented strategies. On the other hand, large telecom players like AT&T and Verizon Wireless continue to gain video subscribers, offering stiff competition to the cable company. Moreover, low-cost video streaming offerings by companies like Netflix and Hulu will further affect the company’s subscriber growth. Also, a soft TV advertising environment might further hamper the company’s top-line growth. In addition, the company anticipates 2015 capex to be higher than 2014 levels.
Meanwhile, Time Warner Cable’s Internet services face competitive threat from the likes of Google Fiber, Comcast etc. Further, in markets like Kansas City, the company has lost many customers to Google Fiber’s Internet services. As Google Fiber services expand to other areas, Time Warner may face higher churn rate due to such competitive pressures.
Please refer to the Zacks Research Digest spreadsheet of TWC for specific revenue estimates.
Margins
Provided below is a summary of margins as compiled by Zacks Digest: