Static on Time Warner's Lines

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Time Warner Inc. reported a slowdown in telephone and digital-cable customer growth just one week after the nation's largest cable operator, Comcast, announced particularly strong growth in its phone business.

The parent of Time Warner Cable, the No. 2 U.S. multiple-system operator, said it added about 187,000 voice customers in the period, its second consecutive quarter of decelerating growth. It reported 230,000 voice additions in the second quarter, down from the 270,000 additions in the first quarter.

Digital-cable subscriber additions were also down — 136,000 in the third quarter (143,000 when adjusted for the recent acquisition of Adelphia Communications) compared to 163,000 in the second quarter.

Two key subscriber metrics showed sequential gains — basic-cable customers and high-speed Internet subscribers. The company gained 33,000 basic customers in its historic systems and 3,000 overall. Internet customers were up 251,000. Of that, 214,000 came from the systems that Time Warner already owned.

By comparison, Comcast added 483,000 phone customers in the third quarter, up from 306,000 additions in the second quarter. The surge helped lift investor opinion of the entire cable sector.

The decline in Time Warner Cable's voice-customer growth prompted at least one Wall Street analyst to revise his estimate of what a share of its stock should be worth, in its pending initial public offering.

In a research report, Pali Research cable analyst Richard Greenfield said the declining voice growth prompted him to reduce his share-price estimate from $35 to $34.

When Time Warner Cable filed for its IPO in October, the shares to be offered were estimated to be worth about $5.5 billion.

In his report, Greenfield said that after poring over Time Warner Cable's subscriber numbers, the slowdown in voice additions appeared to have begun after it penetrated 7.6% of homes passed with telephone service in the first quarter. The significance of that penetration number is that cable's other leader in voice services — Cablevision Systems — was able to keep accelerating its phone-subscriber growth quarter to quarter, right through the time its service was in 19% of homes passed.

While Greenfield wrote that he does not believe that means that Time Warner won't be able to achieve 20% penetration rates for voice, it could mean reaching that milestone will take a little longer than expected.

Janco Partners analyst Matt Harrigan said he has not yet placed a value on the IPO, but said the third-quarter results did dampen his enthusiasm a bit.

Prior to the earnings announcement, Harrigan said, many investors and analysts had believed Time Warner Cable would trade at a premium to Comcast's multiple of 8.4 times cash flow.

“Probably now it's moving more toward parity,” Harrigan said.

Jefferies & Co. cable analyst Robert said a slight deceleration in telephone-subscriber growth is not an indication of impending doom.

“You have to take a look at this realistically,” Routh said.

He pointed to the potential for growth in the former Adelphia systems, which currently don't offer phone service.

Time Warner Inc. chief operating officer Jeffrey Bewkes explained the deceleration in historic phone additions by stating that the first 10 points of penetration is easier to obtain than the second 10 points.

Later, he noted that with Adelphia “we've got a lot of phone territory that we just picked up that's going to be the easy 10 points.”

“Have we hit a ceiling?” Bewkes continued. “No, it's very clear to us that we haven't,” adding that mature phone markets like Albany, Syracuse and Binghamton, N.Y., have voice penetration above 20%.

“We don't see why we can't get there and keep moving up across our footprint,” Bewkes added.

Lost in the shuffle was the fact that Time Warner Cable's financial performance was stellar in the period. Including the Adelphia systems, revenue surged 44% to $3.2 billion and adjusted operating income before depreciation and amortization (AOIBDA, a measure of cash flow) rose 28% to $1.1 billion in the period.

In historic Time Warner Cable systems, revenue rose about 15%. The company did not release cash-flow results for those operations.

Overall, Time Warner Inc. reported 7% revenue growth to $10.9 billion, while AOIBDA was up 16%, to $2.9 billion.

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