Time Warner Cable: Much Work Ahead

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On the eve of its first trading day as a separate public company, Time Warner Cable gave the analyst community a deeper look into its operations, predicting strong growth for the year but also revealing that it has some very heavy lifting to do.

Time Warner Cable officially became a public company Feb. 13, the day Adelphia Communications’ bankruptcy plan was approved.

Time Warner Inc. -- which jointly purchased Adelphia’s assets with Comcast in July for $17.4 billion -- had planned to spin off Time Warner Cable as part of the deal, through the already-public Adelphia shell. Time Warner Cable stock is set to begin trading on the New York Stock Exchange Thursday under the symbol TWC.

On Wednesday morning, Time Warner Cable executives held a conference call with analysts to provide guidance for 2007 and, as CEO Glenn Britt said, “formally introduce ourselves to the investment community and share our perspective of the business.”

Time Warner Cable -- with about 13.4 million subscribers after the Adelphia acquisition -- said revenue and cash flow should rise in the mid- to high-30% range in 2007 and capital expenditures will rise $600 million-$800 million for the year, mainly due to the integration of about 4 million new subscribers as a result of the Adelphia deal. Time Warner also estimated that it would generate $800 million-$1 billion of free cash flow in 2007.

In the one-hour conference call, chief operating officer Landel Hobbs shed some more light on the integration plans, adding that the company’s Start Over program-replay service will be rolled out to a majority of its systems by the end of the year. Time Warner Cable also plans to add 200,000 digital-telephone customers in the former Adelphia markets by the end of 2007.

But the newly acquired systems are going to need a lot of work. While Time Warner Cable has made some integration headway already -- it converted 14 of 23 billing systems; migrated 80% of high-speed-Internet customers to its product; completed most channel-lineup changes; and made digital phone available to about 900,000 homes in acquired markets -- operating performance at the new systems is significantly behind Time Warner Cable’s legacy systems.

This presents a big upside opportunity once the integration is complete, which is expected by the end of the year. To illustrate that point, chief financial officer John Martin pointed out that average monthly revenue per unit at the new systems trails the legacy properties by about $18 per month; cash-flow margins are 10 percentage points below the legacy properties; video-penetration rates are 42% at the new systems versus 56% in the legacy systems; and high-speed-data penetration of 17% is 13 points below the rest of Time Warner Cable.

The numbers are even more dramatic at two of the largest properties Time Warner Cable acquired in the deal -- Los Angeles and Dallas. Those two systems accounted for 80% of the 52,000 basic subscribers lost in the new properties in the fourth quarter, have video-penetration rates of about 30% and have cash-flow margins 5-10 points below the other new properties.

Hobbs said Time Warner Cable should begin to stem the subscriber losses in L.A. and Dallas in the second half of the year.

“We’re placing a lot of focus on the acquired systems in L.A. and Dallas,” he added. “While these systems present the biggest challenges, they also represent significant long-term opportunity. Together, these two systems represent about one-half of our [acquired] subscribers. Both have complex integration efforts and will require substantial focus and resources to turn around. But let’s be clear: We have every expectation that we will turn them both around.”

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