TWC Earnings: Ups, Downs & Merger Clues

With revenues up, but net income down, Time Warner Cable's 2015 second-quarter earnings report was a mixed bag.

On the one hand, the company's subscriber numbers were some of the best it's seen since 2008. On the other hand, skyrocketing programming costs and increased investment in sales and marketing put a damper on the second quarter bottom line.

Overall, Time Warner Cable Inc. (NYSE: TWC) added 66,000 residential customers in the second quarter -- its first positive spring quarter in seven years -- with only video subscribers dipping into negative territory. The number of TWC video subscribers decreased by 45,000, but even that number was an improvement over previous years. Broadband subscribers climbed by 172,000, and voice subscribers jumped 252,000, in large part because of an uptick in customers signing up for the MSO's triple-play bundle.

In total, Time Warner Cable today has more than 14.5 million residential customer relationships, including more than 10.5 million video subscribers, more than 12 million data subscribers and nearly 6 million voice subscribers.

TWC Chairman & CEO Rob Marcus credited much of the subscriber growth to the continued rollout of TWC Maxx upgrades and increased customer satisfaction. The higher volume of customers and the growth in triple-play subscribers for the second quarter translated into nearly $4.8 billion in revenue on the residential side, a 2.1% increase compared to a year ago. Total revenue for the quarter exceeded $5.9 billion, thanks to a 16.2% jump in the business services sector.

Time Warner Cable's improvements, however, have come at a price. Operating expenses shot up almost across the board in the spring quarter, with programming and other content fees bumping up to nearly $1.5 billion, an increase of 11% over the second quarter of 2014. Sales and marketing, technical operations and customer care costs were also all up between 8% and 10%.

Addressing programming fees and bundles, Marcus emphasized a few critical points. For example, he said he's intrigued by the concept of skinny TV bundles and will continue to assess the company's options for providing more content flexibility. However, he noted that 80% of TWC's video customer base today already choose the company's higher-end "preferred video product" over lower-cost bundles, suggesting that the full bundle still has strong appeal.

Marcus also ran through the pros and cons of programmers going direct to consumers with their content. With regard to competing with programmers' over-the-top offerings, Marcus said he still believes TWC has the best product because of its breadth of content, better quality picture and more on-demand choices. And if programmers try to undersell cable operators, Marcus warned that they risk hurting their biggest distribution channel.

Reflecting on the broader over-the-top trend, Marcus stated that, "At the highest level, we embrace over-the-top video." He added that OTT video "highlights the value of the high-speed data offering that we deliver, we think, better than anybody else."

Turning to the pending acquisition of Time Warner Cable by Charter Communications Inc. , Marcus didn't shy away from answering analyst questions about the deal. While saying that the company continues to operate as if it will remain an independent entity, Marcus reaffirmed that TWC is "working toward a year-end closing of the transaction." (See FCC Sets Up Review Team for Charter Deals.)

He ticked off some recent deal milestones, including the fact that the Federal Communications Commission (FCC) officially accepted the application for the transaction on Monday, which should mean that the start of the 180-day review clock is imminent. Time Warner Cable is also now responding to a second request for information from the US Department of Justice and has filed all of the necessary franchise requests at the state and local levels.

— Mari Silbey, Senior Editor, Cable/Video, Light Reading