Rough Forecast for Time Warner Cable

10/26/2007 8:00 PM Eastern

Cable earnings season will heat up next week with Time Warner Cable expected to issue its third-quarter results, and some analysts are predicting that the period will be a rough one for the nation’s second-largest cable operator.

Time Warner Cable disappointed investors with lackluster second-quarter results in August. The company has been hinting that seasonality (fueled by college students and snowbirds who disconnect service as they migrate to summer residences), typically a big factor in subscriber losses during the May to June time frame, bled into September. At least one analyst has taken those hints to heart, downgrading his rating on the stock and reducing his financial estimates for the third quarter.

TWC By the Numbers
Three cable analysts — Anthony Noto, Craig Moffett and Bryan Kraft — have reduced their third quarter estimates for Time Warner Cable, based primarily on signals that management has sent to the investment community over the past month. Below are those analysts’ estimates for the period.
Noto Moffett Kraft
SOURCE: Goldman Sachs, Sanford Bernstein and Credit Suisse First Boston reports
Revenue$4.05 billion$4.13 billion$4.036 billion
Cash flow$1.43 billion$1.46 billion$1.415 billion
Basic subscriber losses50,00050,00055,000
Digital subscriber additions200,000180,000136,000
High-speed Internet subscriber additions240,000231,000213,000
Digital phone subscriber additions 265,000264,000260,000

At the Merrill Lynch Media & Entertainment conference in September, Time Warner Cable chief operating officer Landel Hobbs warned that seasonality would creep into the third quarter, adding, “Just now, in the last couple of weeks, we’ve seen seasonality exiting the business.”

The integration of former Adelphia Communications systems has been a struggle for Time Warner Cable, with subscriber losses mounting in the newly acquired territories, offsetting growth at the cable company’s legacy properties. And though Hobbs said at the September conference that progress was being made in many Adelphia systems — the triple play of voice, video and high-speed Internet service was launched in Los Angeles in August — there is still a long row to hoe.

In a research note last week, Goldman Sachs media analyst Anthony Noto wrote that in light of increased competition from telephone companies like Verizon Communications and AT&T, as well as problems integrating former Adelphia systems acquired last year, he has incorporated an “extreme downside” scenario into his estimates for the second-largest cable operator in the country.

As a result, Noto reduced his full-year 2007 earnings estimates for the cable company from $1.08 per share to $1.03 per share and his 2008 earnings predictions from $1.43 per share to $1.36 per share. Noto also reduced his 12-month price target on the stock from $39 per share to $35 per share.

Noto’s “extreme downside” scenario for the basic-video business estimates that Time Warner Cable would lose 10% of its basic subscribers and have minimal rate increases by 2010 as a result of stiffer competition.

While he does not believe losses will be quite that severe, Noto added that he is taking this particular stand “to avoid underestimating competitive factors, which we think could increase at an accelerated rate.”

For the third quarter, Noto estimated TWC will report revenue of $4.05 billion (versus consensus estimates of $4.06 billion), cash flow of $1.43 billion (versus $1.45 billion consensus) and that basic-subscriber losses will reach 50,000 customers, a slight improvement over the 57,000 basic customers lost in the second quarter. Noto also predicted Time Warner Cable will add 200,000 digital subscribers (vs. 184,000 in the second quarter), 240,000 high-speed Internet subscribers (vs. 188,000 in the second quarter) and 265,000 telephony customers (vs. 241,000 in the second quarter) in the period.

Sanford Bernstein cable and satellite analyst Craig Moffett also reduced his subscriber-growth metrics for the quarter, largely based on Time Warner Cable management comments at recent conferences. Moffett now believes that TWC will lose 50,000 basic customers in the quarter (compared to his previous estimate of a loss of 14,000 basic subscribers). Moffett also reduced his estimates for high-speed Internet additions from 286,000 to 231,000 for the period.

“By now, it’s not lost on anyone that Time Warner Cable is struggling in its acquired systems. In a series of presentations at investors’ conferences last month, TWC did its level best to prepare investors for weak 3Q numbers,” Moffett wrote.

Credit Suisse First Boston cable analyst Bryan Kraft also joined the litany, upping his estimates for third-quarter basic-customer losses to 55,000 from 6,000.

Time Warner Cable stock has been hit hard in the past year — shares are down 16.2% ($6.31 each) since it went public on March 1 — as basic-subscriber growth has waned. Noto does not expect any relief soon.

“We expect Time Warner Cable shares to remain stagnant until signs of penetration gains in the acquired systems become visible, which is not likely until the fourth quarter or early 2008, in our view. In the meantime, investors will focus on telco and satellite taking share,” Noto wrote.

Pali Research media analyst Richard Greenfield also reduced his full-year estimates for Time Warner Cable, pointing to the difficult Adelphia integration.

In his note, Greenfield wrote that his new estimates are now below Time Warner Cable’s own 2007 guidance.

“[It’s] hard to believe that a company that had two years to prepare for an integration of Adelphia and whose top-end of guidance was originally viewed by investors as overly conservative is now likely to miss expectations,” Greenfield wrote.

Time Warner Cable is scheduled to release third-quarter earnings on Nov. 7.

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