Time Warner Cable Outperforms - Analyst Blog

Time Warner Cable Inc. (TWC) reported excellent third quarter 2010 financial results, which exceeded the Zacks Consensus Estimate. Both Commercial and Residential subscription revenue grew together with Advertising revenue growth. Management also announced that the board of directors of Time Warner Cable has authorized a massive share buyback program of $4 billion.

Quarterly GAAP net income was $360 million or $1 per share compared with a net income of $268 million or 76 cents per share in the prior-year quarter. Second quarter 2010 adjusted (excluding restructuring costs) EPS of $1.04 was significantly above the Zacks Consensus Estimate of 89 cents.

Revenue

Total quarterly revenue surged 5.2% year over year to $4,734 million and exceeded the Zacks Consensus Estimate of $4,719 million. This was attributable to an increase in Residential subscription revenue, Commercial subscription revenue, and Advertising revenue.

Margins

Adjusted operating income before depreciation and amortization (OIBDA) has climbed 5.7% year over year to $1,715 million. This was primarily due to a healthy growth in the top-line, offset by higher video programming, marketing and voice costs. Video programming expense was $1 billion, (up 3.5% year over year), employee expenses were $979 million (up 4% year over year), marketing cost was $156 million (up 21.9% year over year), and voice cost was $156 million (up 11.4% year over year). GAAP operating income grew 12% year over year to $927 million, driven by higher adjusted OIBDA, partially offset by higher depreciation expense.

Cash Flow

Operating cash flow during the first nine months of 2010 was $3,774 million, compared to $3,805 million in the year-ago period. Free cash flow (cash flow from operations, less capital expenditure together with principal payment for capital lease and intangible assets) for the same period was $1,626 million compared to $1,518 million in the prior-year period.

Balance Sheet

At the end of the quarter, Time Warner Cable had $2,033 million of cash & marketable securities compared to $2,023 million at the end of fiscal 2009. Total debt at the end of the quarter was $21,314 million compared to $22,331 million at the end of fiscal 2009. At the end of the quarter, debt-to-capitalization ratio was 0.69 compared with 0.72 at the end of fiscal 2009.

Subscription Segment

Total Subscription revenue in the third quarter has increased 4.5% year over year to $4,511 million, attributable to a 3.5% increase in residential subscription revenues and a 21.6% increase in commercial subscription revenues. Within this segment, Video revenue was $2,743 million (up 1.7% year over year), High-speed Data revenue was $1,255 million (up 10.3% year over year), and Voice revenue was $513 million (up 6.9% year over year).

Advertising Segment

Advertising revenue increased 22.5% year over year to $223 million.

Subscriber Statistics

During the third quarter of 2010, Time Warner Cable lost 63,000 Revenue Generating Units of which 17,000 are Primary Service Units. At the end of the reported quarter, Basic Video subscribers were 12,551 million, down 155,000 year over year. Residential High-speed Data subscribers were 9.386 million, up 95,000 year over year. Commercial High-speed Data subscribers were 0.324 million, up 9,000 year over year. Residential Digital Phone subscribers were 4.324 million, up 22,000 year over year. Commercial Digital Phone subscribers were 0.102 million, up 12,000 year over year.

During the same quarter, Time Warner Cable added 14,000 Triple play subscribers to 3.672 million, added 15,000 Double play subscribers to 4.904 million, and lost 89,000 Single play subscribers to 5.862 million.

Recommendation

We maintain our long-term Neutral recommendation for Time Warner Cable. Currently, it is a short-term Zacks #3 Rank (Hold) stock.