Cable Operators

Buyback Plan Propels Time Warner Cable

11/08/2010 12:00 AM Eastern

Cable earnings season continued
last week, with Time Warner Cable stock
reaching a new 52-week high — not necessarily
for its strong operating performance,
but for a plan to return cash to shareholders
that far exceeded expectations.

Shareholders were waiting for Time
Warner Cable to announce a pretty hefty
share-repurchase plan, in conjunction with
third-quarter results last Th ursday — investors
ran up the stock $1.22 per share (2.1%)
last Wednesday, in anticipation of the announcement.
But when the nation’s secondlargest
MSO said that it would repurchase
$4 billion of its own shares over time (no exact
timeframe was given for the plan) it surprised
even the most jaded cable watchers.

Collins Stewart media analyst Tom Eagan
summed up the reaction in the title to
a research report Nov. 4: “$4 billion. Wow.”

That news, coupled with a surging stock
market (the Dow Jones Industrial Average
finished up 219.7 points on Nov. 4 to
11,434.84, its highest level since 2008), sent
TWC stock to a new 52-week high of $63.98
last Thursday. The stock closed at $62.33
per share, up $2.67 each or 4.5% per share.

BULLISH ON BUYBACK

The buyback news — TWC chief financial
officer Rob Marcus said on a conference
call with analysts that the MSO could potentially
repurchase as much as 20% of
its current market cap over time at current
stock prices — overshadowed what
were some surprisingly strong financial
numbers in the quarter. Although Primary
Service Units — a measure of total
customer relationships — were negative
for the first time ever for the MSO, investors
had been expecting it since Marcus
warned of the possibility at an industry
conference in September. And in retrospect, the blow
wasn’t as severe as many thought it would be.

PSUs declined by 17,000 in the quarter, fueled by a
loss of about 155,000 basic video customers and slower
growth in high-speed data (104,000 vs. 121,000 last year)
and phone (34,000 vs. 72,000 last year). However, it didn’t
seem to impact financial results.

Revenue rose 5.2% to $4.7 billion, and adjusted earnings
before interest, taxes, depreciation and amortization
was up 5.7% to $1.7 billion, in line with analysts’ estimates.

On a conference call with analysts, TWC chairman and
CEO Glenn Britt said the sluggish subscriber growth was
mainly due to the economy. And in that vein, the company
said that it is poised to offer a lower-cost video package
to customers.

Britt wouldn’t say when, where or at what price that
package would be introduced. Though there has been
some resistance from programmers, he said, the MSO has
managed to make smaller packages a reality.

“We have negotiated some additional flexibility beyond
what we had a few years ago that will allow us to begin to
offer some smaller packages at lower prices,” Britt said.
“Probably not all the way where we’d like to be, but we’re
moving in the right direction.”

Other multichannel video providers that reported results
last week also seemed headed in that direction. For Charter
Communications, basic customers again fell (by about
64,000), but gains in digital cable (42,000), high-speed data
(51,000) and phone (30,000) customers helped drive revenue
generating unit growth above analysts’ expectations.

Cablevision Systems also lost basic subscribers in the
period — 25,000 — but gains in high-speed data
and phone customers helped drive total revenue
up 5.6% and adjusted operating cash flow up 3.6%.

At rival satellite-TV service provider DirecTV,
net new subscriber growth surged to 174,000,
soundly beating increases in the first and second
quarter, and testament to its strategy of targeting
high-end customers.

Including its Latin American operations, net
new subscribers rose by about 380,000 customers.

The U.S. results built on the momentum of the
first two quarters of the year, when the satellite
giant added 100,000 net new subscribers in each
three-month period.

The subscriber growth also translated into
strong financial gains. Consolidated revenue
was up 10.2%, to $6 billion, and operating profit
before depreciation and amortization was up
10.1%, to $1.5 billion. In the U.S. segment, revenue
rose 7%, to $5 billion, and OPBDA was up
just 1.1% to $1.2 billion, mainly because of costs
associated with subscriber additions.

SUB LOSSES HIT DISH

Subscriber losses continued to plague Dish Network
in the third quarter, as the second largest
U.S. satellite-TV service provider lost about
29,000 customers in the period, a sign that
some analysts said pointed to its focus on priceconscious
customers.

It was the second consecutive quarter of subscriber
losses for Dish, after subtracting about
19,000 customers in the second quarter. Sanford
Bernstein cable and satellite analyst Craig Moff ett
singled out the subscriber “shrinkage” as a sign
that Dish is once again headed for rough waters.

Dish executives hinted indicate subscriber
losses could continue in the fourth quarter, a
carryover from a 30-day carriage dispute with
Fox Networks (involving 19 regional sports networks,
FX and National Geographic Channel).

Financial growth was in line with most estimates
— revenue at $3.2 billion was marginally
ahead of consensus — and average monthly revenue
per customer increased 6.8%, to $74.24. On the downside,
subscriber acquisition costs rose and customer churn
increased, according to Moffett.

September