Cable Operators

TWC Ups Spending for Super Headend

8/01/2011 12:01 AM Eastern

Cable TV is continuing to stand out as a
weak spot for Time Warner Cable — but don’t blame Internet
video.

The operator’s cable-TV rolls shrank in the second quarter
by 128,000, more than Wall Street expected even in a
historically weak season for cable. Executives, however,
chalked up the drop to competitive pressures and a feeble
economy, rather than so-called cord-cutting. Meanwhile,
the MSO saw a 35% surge in business-services revenue and
delivered continued growth in broadband, phone and advertising.

Time Warner Cable’s second-quarter revenue was $4.94
billion, up 4.4% year over year, in line with analysts’ expectations.
Net income for the three months ended June
30 was $421 million ($1.24 per diluted share), beating analysts’
forecasts and up 23% from the year-ago period.

“TWC continues to execute on strong [revenue per subscriber]
growth while aggressively returning capital to
shareholders, plus we are encouraged by accelerating organic
growth in business services,” Morgan Stanley analyst
Ben Swinburne wrote in a research note. “However,
this quarter’s results highlight a rapidly maturing residential
business, while a modest uptick in competitive intensity
adds incremental risk to the ARPU-driven growth thesis.”

CAPITAL PROJECTS

Time Warner Cable will increase capital spending in the
second half of the year, as the operator builds out a new
“super headend” facility in Charlotte, N.C., and embarks
on a five-year plan to convert to all-digital across its footprint.

The operator’s planned 178,000-square-foot, two-story
data center in Charlotte — expected to be finished by
the end of 2012 — will include 1,600 racks of technical
equipment. The facility will provide a virtualized “cloud”
environment that will represent one of the MSO’s two national
super headends, complementing the current facility
in Denver, Time Warner Cable chairman and CEO Glenn
Britt said on an earnings call last week.

“Over the next two years, we plan to migrate the origination
and distribution of our video service to this facility and
to a matching one in the Denver area, generating operating
cost savings and enabling us to more completely standardize
the provision of services across our footprint,” Britt said.

On a separate track, TWC said it has initiated an all-digital
conversion project in its Augusta, Maine, system, using
digital terminal adapters to replicate the analog lineup for
customers with older TVs who don’t want a digital set-top.
Time Warner Cable currently operates all-digital systems
in New York and parts of Los Angeles.

Initially, TWC will use Technicolor DTAs in Augusta,
and may tap other vendors for later deployment.

The MSO’s capital spending for the first half of this year
was down 7.4%, to $1.36 billion. Time Warner Cable president
and chief operating officer Rob Marcus said full-year
capex will be $2.9 billion to $3.0 billion, in line with previous
guidance. In 2010, TWC capital expenditures totaled
$2.93 billion.

AGGRESSIVE RIVALS

Time Warner Cable execs said offers from satellite and
telco competitors are becoming increasingly aggressive.
DirecTV in particular is pitching a $29.99-per-month
video package that includes the “NFL Sunday Ticket”
out-of-market game package for no extra charge, Marcus
noted.

In the second quarter, a disproportionate number of
video losses (a decline of 130,000 residential subscribers,
offset by a 2,000-subscriber net gain in the business
segment) were analog, single-play video customers, Marcus
said. Time Warner Cable added digital and bundledvideo
customers in the period.

On video, ARPU increased 3.8%, to $73.46, driven by
increased equipment rental fees and subscribers taking
higher-priced tiers. That was offset by a $14 million yearover-
year drop in premium and transactional VOD, with
the biggest component of the decline (more than onethird)
represented by fewer adult VOD rentals.

Asked about the threat of over-the-top video, Britt said
that seasonality — meaning cable TV’s historically weak
second quarter — in combination with continued macroeconomic
weakness had a bigger effect on Time Warner
Cable’s residential business than cord-cutting.

“To the best of our market-research ability... the effect
right now [of over-the-top video] is very, very modest,” Britt
said. “It’s hard to measure, it’s so small.”

September