Time Warner Cable’s Mixed 2Q: Revenue, Cash Flow Up; Basic Subscribers Down

8/01/2007 10:00 AM Eastern

Time Warner Cable reported mixed second-quarter results Wednesday, with revenue and cash flow growth at about 9% -- in line with analysts’ estimates -- but basic-subscriber losses greater than most analysts’ expectations.

The MSO lost 57,000 basic-video customers during the period, mostly in the former Adelphia Communications systems it acquired last July. Many analysts had predicted second-quarter basic losses of 9,000-11,000 customers.

Chief operating officer Landel Hobbs vowed to win many of those customers back, adding that the second-largest cable operator in the country would focus on offering a variety of low-cost tiers of voice, video and high-speed-data service to address price-conscious consumers.

Time Warner Cable said on a conference call with analysts that the bulk of the basic-subscriber losses -- about 80% -- were in the former Adelphia systems, particularly in Los Angeles and Dallas.

On the call, Hobbs said the operator is implementing four different tiers of high-speed-data service in all of its divisions -- a “lite” tier at 768 kilobits per second, a basic tier at 1.5 megabits per second, a standard tier at 7 mbps-10 mbps and a turbo tier at 10 mbps and above.

On the voice side, Hobbs said Time Warner Cable introduced in about two-thirds of its divisions an unlimited in-state phone service, targeting the estimated 30% of consumers who spend $25-$44 per month on landline telephony, as well as a second-line service.

The cable operator also created a local-only tier, which addresses the 15% of phone users who never make long-distance calls and generally spend $15-$25 per month on phone service. That tier already launched in four divisions in the past 30 days, Hobbs said.

Time Warner Cable also plans to launch an international calling plan in the third quarter.

“We’re never happy with losing basic subscribers,” Hobbs said on the conference call. “We know that satellite will typically zero in on these low-value customers, but I want to keep these customers, so I’m going to use the bundling concept. By mixing and matching parts of the bundle, we’ll develop a bundle that is attractive to these low-end customers -- even these basic-only video customers -- to retain them and upsell them into higher-priced packages. That’s how we will attack the basic-video issues you saw this quarter.”

But investors didn’t seem to buy it, driving down Time Warner Cable stock by nearly 5% ($1.87 per share) to $36.35 in early trading Wednesday.

Revenue for the period was up 9% to $4 billion, marking the first quarter in which the company has hit the $4 billion milestone. Operating income before depreciation and amortization (OIBDA, a measure of cash flow) was up 9% to $1.4 billion.

Time Warner Cable also added about 184,000 digital subscribers, 188,000 high-speed-data customers and 241,000 voice customers during the period.

Chief financial officer John Martin also revealed that the cable operator is part of the bidding for Insight Communications, which has about 650,000 customers in the Midwest, many near existing Time Warner Cable systems.

“We’re participating in the process and we’re emphasizing our usual disciplined approach to evaluating strategic opportunities of this sort,” Martin said. “Beyond that, it would be inappropriate to make any further comment.”

Also on the call, the MSO revealed that Sprint Nextel decided to exit the SpectrumCo partnership, the consortium of cable operators that participated in the federal advanced-wireless-spectrum auctions last year. Sprint owned a 5% interest in the partnership and had the right to exit after giving the other partners 60 days’ notice.

Time Warner Cable said in its 10-Q quarterly report that its contribution to the Sprint buyout will be about $30 million. Sprint is still participating in the separate cable/wireless consortium, dubbed Pivot.

On the conference call, CEO Glenn Britt said Sprint’s departure from SpectrumCo will have little impact.

“They decided they had a better use for that capital,” he added. “It’s a relatively small amount of money, but not a big deal or of big significance one way or the other.”

Britt declined to give any detail about the consortium’s plans for the AWS spectrum, but he added that one reason for any delays is that the new owners of the frequencies have to wait for exit users to roll off before they can use it.

“There are other users on it,” Britt said. “There’s a whole process called clearing that is well-known in the wireless industry. That is going on, and it takes a while to get the existing users off. It’s not like we’re just sitting here.”