TWC Stock Rises On Deal Spec Despite Mediocre Q2

Analyst Says Sluggish Results Drive Investor Cry For a Deal

Time Warner Cable’s outgoing chairman and CEO Glenn Britt went silent about halfway through the MSO’s second quarter earnings conference call with analysts Thursday morning, but investors managed to make their own noise, sending the stock up by more than 3% in what some analysts called a cry for the nation’s second largest MSO to be acquired.

 Britt, who has been battling a case of laryngitis that dates at least back to the company’s announcement on July 25 that he would retire at the end of the year, couldn’t make it through the Question and Answer portion of the call before his voice gave out, deferring to his eventual replacement, current chief operating officer Rob Marcus. And while Marcus did an admirable job in trying to explain the MSO’s performance, the numbers more than spoke for themselves.

TWC missed practically every operational target for the period. Basic video losses at 189,000 topped last year’s mark of 169,000 and were above analysts’ consensus estimates of a decline of 175,000. Most troubling to some, however, was the fall off in high-speed data customer additions. TWC added just 21,000 HSD customers in the period, less than half the 59,000 added in the second quarter of 2012 and well below consensus of 55,000 additions. The MSO also lost 56,000 phone customers, compared to a gain of 45,000 voice customers in the prior year.

“Given this [HSD] is viewed as cable's growth engine, and peers have accelerated net adds, this remains a source of concern for TWC,” wrote Credit Suisse media analyst Michael Senno in a research note.

Despite those disappointing results, Time Warner Cable stock was up 3.7% ($4.13 each) in early trading to $118.20 per share, finishing the day at $117.68 each, up 3.2% or $3.61 per share. In an e-mail message, Pivotal Research Group principal and senior media & communications analyst Jeff Wlodarczak said the bump in the price stock was likely due to deal speculation. Over the past few months, Charter and one of its largest shareholders, Liberty chairman John Malone, have made several overtures to acquire TWC, which have been rebuffed.

“The mediocre Time Warner Cable results add fuel to the Charter deal fire,” Wlodarczak wrote. He added that despite the disappointing results, TWC’s performance was pretty close to his own estimates for the quarter.

Moffett Research principal and senior analyst Craig Moffett also pointed to the disappointing results as a possible catalyst for a Charter deal.

“The challenge facing TWC over the coming days and weeks is to convince investors that at least the trajectory is improving and that they deserve more time,” Moffett wrote in a research report. “By this argument, rock bottom was their disastrous fourth quarter report. Q1 wasn’t bad. And Q2 was just a little better… if you squint.”

On the conference call, Marcus explained that an aggressive promotional offer from AT&T’s U-Verse product especially in the Midwest helped drive video losses – he said that although the Midwest only accounts for about one-fourth of its total Primary Service Units (a mix of video, voice and data customers), the region was responsible for more than half of the company’s total PSU losses.

Marcus said TWC has responded to AT&T’s promotional offerings and that the region should show improvement in the coming quarters.

Although basic video subscriber performance did not improve, Marcus said that was in part due to the company’s focus on attracting higher-ARPU subscribers That, he said,  sometimes results in reduced additions.

TWC has revamped its packaging in an attempt to offer products that reflect its customers’ needs, Marcus said.  

While the second quarter is typically seasonal as college students and Snowbirds disconnect service for their summer residences, TWC’s performance was in sharp contrast to that of the nation’s largest MSO. Comcast. Comcast, which reported its second quarter results Wednesday, improved on almost every front, despite U-Verse expanding its service capabilities to an additional 1 million homes in its footprint in the period.

Marcus said on the call that the company continues to make progress regarding its new initiatives, adding that recurring revenue per newly connected customers was up in the high single digits during the quarter, and for newly connected triple play connects, recurring revenue rose 15%. But he stressed the new initiatives have only been in place for about six months.

“Only about 10% of our customers currently have the new packages, Marcus said. “As a result, the impact on overall ARPU is still modest. Over time though, we fully expect that higher new connect ARPU will contribute to meaningfully better ARPU growth per customer relationship.”  

Marcus tried to deflect the inevitable questions surrounding M&A, reiterating the company’s stance that its primary objective is to increase shareholder value. He added that any deal would have to pass the litmus test of presenting a greater value than repurchasing its own stock.  To that end, TWC also announced that it has authorized an increase in its share repurchase plan to $4 billion, adding that it plans to repurchase $2.5 billion of its own stock this year. The company is already more than half way toward achieving that goal, having repurchased about $1.3 billion of its stock to date.

On the conference call, chief financial officer Arthur Minson said the reauthorization of the repurchase plans should send a clear signal.

“We wouldn’t be announcing a reauthorization if we weren’t going to be in the market,” Minson said. “Obviously the intent is to be in the market and we would only be so if we saw that as value-creating.”

And regarding comparisons to Comcast’s performance, Marcus said that scale does help – Comcast has about 21 million customers while TWC has about 12 million. But he added that scale doesn’t necessarily translate into synergies, especially on the programming side.

 Marcus said programming cost synergies are very case-specific.

“Whether or not synergies from programming cost improvement would exist in other transactions really depends on the programming costs that existed before the transaction and then  how the structure of the transaction affects whether those programming costs could be realized by putting additional systems under our contracts or vice versa ,” Marcus said. “In most cases, we have not talked about programming cost synergies emanating simply from being larger. In theory there could be some benefit from that as well.”