Time Warner’s Results Do Their Part

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Stronger-than-expected results at Time Warner Inc.’s cable operations continued to fuel optimism for a turnaround in the cable stocks sector.

But it did little to help the media giant’s stock, which was driven down by fears that bad news at its AOL online unit would only get worse.

Overall, Time Warner reported a 1% revenue increase to $10.5 billion and a cash-flow gain of 8%, to $2.7 billion.

Driving virtually all of that growth was Time Warner Cable, which arguably had its best quarter in this decade. Basic subscribers rose by 82,000 customers (its strongest growth in six years), digital customers increased by 240,000 (its best results since 2001), high-speed Internet customers rose by 346,000 (its first 300,000-plus quarter ever) and digital telephone customers gained 270,000 subscribers (its best quarter since launching the service system-wide last year).

TOPS IN TELEPHONE

Time Warner now has 1.4 million telephone customers, tops in the industry.

On the financial side, revenue at the cable unit rose 15%, to $2.6 billion; and cash flow increased 17%, to $932 million.

“In my opinion, Time Warner Cable delivered the best quarter in its history,” Time Warner Inc. chairman and CEO Richard Parsons said on a conference call with analysts to discuss first quarter results. “… The obvious and correct conclusion to take from all of these stellar results is that the triple-play bundle is working.”

Parsons, who said that 9% of Time Warner Cable’s homes passed are taking all three products in the bundle, also used the strong results to take a shot at telco competitors.

“We only see cable’s competitive position getting stronger,” Parsons said. “While the phone companies are only starting to dig up your yard, cable is already in your house.”

Stock analysts have been predicting strong subscriber growth numbers for cable operators since last month’s National Show in Atlanta, where top executives from both Time Warner and Comcast Corp. were overtly optimistic.

In a research report, Merrill Lynch & Co. media analyst Jessica Reif Cohen called Time Warner Cable’s results “the undisputed highlight of the quarter.”

That didn’t translate into a rise in the stock price, however. Investors who in the past have harped on basic-subscriber losses at Time Warner instead turned their focus on bad news from the media giant’s AOL online unit, driving the stock price down 1.1% (20 cents) on May 3, to $17.22.

AOL, which has struggled as more and more customers switch from slow-speed dial-up services to high-speed offerings from cable operators and telephone companies, subtracted 835,000 subscribers in the quarter, ending with 18.6 million customers.

Revenue dipped 7% and cash flow fell 17% in the quarter, reflecting the lost subscribers and somewhat offset by a 25% gain in advertising revenue.

Adding to the pain, Time Warner said on a conference call with analysts that cash flow declines at AOL are expected to continue in the second quarter, with improvement expected in the second half of the year.

Though that seemed to rattle some investors, cable analysts were able to retain their optimism.

“AOL is a disaster and the film studio had substantial negative revenue comps,” said Janco Partners cable and satellite analyst Matt Harrigan. “Time Warner Cable just gets lost in there. I don’t infer any negative commentary on cable, because the revenue disappointment and the numbers at AOL were fairly ugly.”

Aside from a slight decline at Comcast — its share price fell 22 cents on May 3 to $29.92 — the rest of the sector fared fairly well.

The decline at Comcast also came after a nearly 5% ($1.34) bump in Comcast’s stock price April 27, the day it reported first-quarter operating results.

Charter Communications Inc., which reported improved first-quarter earnings May 2, saw its share price rise 2 cents, to $1.15, on May 3 and Mediacom Communications Corp. rose 4 cents that day, to $6.77.

The biggest gain was at Cablevision Systems Corp., perhaps in anticipation of first-quarter results scheduled to be released on May 9. It rose 14 cents to $19.89 on May 3.

HARRIGAN SEES UPTICK

Harrigan said that he expects cable stocks to soar in 2006, fueled by the growth in telephony. He added that the traditional second-quarter growth downturn — as college students and snow birds disconnect their cable as they move to summer residences — may not be as dramatic this year, mainly because of the phone offering. In addition, many triple-play promotional deals require a 12-month commitment, which should also help subscriber retention.

“This year could be an exception, because I think the voice numbers are going to improve sequentially for everyone,” Harrigan said. “I feel that this year we’re not going to get your typical swoon in Q2.”

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