Time Warner Cable Inc. (TWC) reported weak third-quarter 2011 financial results, which fell below the Zacks Consensus Estimates. Moreover, we remain concerned regarding the continuation of massive subscriber loss in its core video segment.
Quarterly GAAP net income was $356 million or $1.08 per share compared with a net income of $360 million or $1.00 per share in the prior-year quarter. Third-quarter 2011 adjusted (excluding special items) EPS of $1.10 was well below the Zacks Consensus Estimate of $1.14.
Total quarterly revenue inched up 3.7% year over year to $4,911 million, missing the Zacks Consensus Estimate of $4,941 million. The year-over-year increase was attributable to higher residential subscription revenue and commercial subscription revenue, partially offset by lower advertising revenue.
Quarterly adjusted operating income before depreciation and amortization (OIBDA) climbed 3.9% year over year to $1,782 million. This was primarily due to healthy growth in the top line, offset by higher video programming, marketing and personnel costs. Video programming expense was $1.1 billion, up 3.5% year over year and employee expenses were $1 billion, up 6.4% year over year. GAAP operating income grew 8.1% year over year to $1,002 million, driven by higher adjusted OIBDA and lower amortization expenses.
During the third quarter of 2011, Time Warner Cable repurchased 8 million of its common stock for a total consideration of $573 million. In the reported quarter, the company also paid $158 million as dividend.
Operating cash flow in the third quarter of 2011 was $1,264 million compared with $1,082 million in the prior-year quarter. Free cash flow (cash flow from operations less capital expenditure together and cash paid for intangible assets and other) in the reported quarter was $613 million compared with $396 million in the year-ago quarter.
At the end of the third quarter of 2011, Time Warner Cable had $5,573 million of cash & marketable securities compared with $3,047 million at the end of fiscal 2010. Total debt, at the end of the reported quarter, was $26,473 million compared with $22,121 million at the end of fiscal 2010. At the end of the third quarter of 2011, debt-to-capitalization ratio was 0.76 compared with 0.71 at the end of fiscal 2010.
Residential Services Segment
Quarterly total revenue was $4,250 million, up 2% year over year. Within the segment, Video revenue was $2,624 million, down 0.5% year over year. High-speed data revenue was $1,119 million, up 7.8% year over year. Voice revenue was $494 million, up 3.1% year over year. Other revenue was $13 million, down 8.3% year over year.
Business Services Segment
Quarterly total revenue was $387 million, up 34.8% year over year. Within the segment, Video revenue was $73 million, up 9% year over year. High-speed data revenue was $187 million, up 17.6% year over year. Voice revenue was $52 million, up 52.9% year over year. Wholesale transport revenue was $39 million, up 56% year over year. Other revenue was $36 million.
Advertising Segment
Advertising revenue inched down 3.1% year over year to $216 million. The decrease was primarily attributable to a year-over-year decline in political advertisement revenues and an overall weakness of the advertising market within Time Warner Cable’s territory.
Other Segment
Other revenue was $58 million, up 1.8% year over year.
Subscriber Statistics
During the third quarter of 2011, Time Warner Cable lost 8,000 Revenue Generating Units, including a net deletion of 16,000 Primary Services Unit. At the end of the reported quarter, Residential Video subscribers were 11.939 million, down 128,000 sequentially. Commercial Video subscribers were 170,000, up 2,000 sequentially.
Residential High-speed Data subscribers were 9.792 million, up 89,000 sequentially. Commercial High-speed Data subscribers were 375,000, up 17,000 sequentially. Residential Digital Phone subscribers were 4.481 million, down 8,000 sequentially. Commercial Digital Phone subscribers were 149,000, up 13,000 sequentially.
In the previous quarter, Time Warner Cable lost 12,000 Triple play subscribers to 3.789 million, added 16,000 Double play subscribers to 4.881 million, and also lost 12,000 Single play subscribers to 5.776 million.
Recommendation
After Comcast Corp. (CMCSA), Time Warner Cable is the second largest cable MSO in the U.S. The company has decided to remain as a pure-play cable operator concentrating on superior content distribution and delivery. We maintain our long-term Neutral recommendation on Time Warner Cable. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.
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