Time Warner Cable Inc. (TWC) reported solid second-quarter 2011 financial results, which exceeded the Zacks Consensus Estimates. However, we remain concerned about massive subscriber loss in its core video segment.
Quarterly GAAP net income was $420 million or $1.24 per share compared with a net income of $342 million or 95 cents per share in the prior-year quarter. Second-quarter 2011 adjusted (excluding special items) EPS of $1.19 was well above the Zacks Consensus Estimate of $1.15.
Total quarterly revenue surged 4.4% year over year to $4,944 million, surpassing the Zacks Consensus Estimate of $4,933 million. This was attributable to an increase in residential subscription revenue, commercial subscription revenue, and advertising revenue.
Quarterly adjusted operating income before depreciation and amortization (OIBDA) climbed 4.2% year over year to $1,824 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 4.1% year over year and employee expenses were $1 billion, up 5.1% year over year. GAAP operating income grew 15.8% year over year to $1,063 million, driven byhigher adjusted OIBDA and lower amortization expenses.
During the second quarter of 2011, Time Warner Cable repurchased 11.5 million of its common stock for a total consideration of $863 million. In the reported quarter, the company also paid $163 million as dividend.
Operating cash flow in the second quarter of 2011was $1,510 million compared with $1,306 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 $815 million compared with $571 million in the year-ago quarter.
At the end of the second quarter of 2011, Time Warner Cable had $3,510 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 $24,183 million compared with $22,121 million at the end of fiscal 2010. At the end of the second quarter of 2011, debt-to-capitalization ratio was 0.75 compared with 0.71 at the end of fiscal 2010.
Residential Services Segment
Quarterly total revenue was $4,300 million, up 2.5% year over year. Within the segment, Video revenue was $2,676 million, down 0.1% year over year. High-speed data revenue was $1,115 million, up 8.5% year over year. Voice revenue was $497 million, up 4.4% year over year. Other revenue was $12 million, down 7.7% year over year.
Business Services Segment
Quarterly total revenue was $361 million, up 34.7% year over year. Within the segment, Video revenue was $70 million, up 6.1% year over year. High-speed data revenue was $177 million, up 18% year over year. Voice revenue was $46 million, up 58.6% year over year. Wholesale transport revenue was $39 million, up 95% year over year. Other revenue was $29 million, up 867% year over year.
Advertising Segment
Advertising revenue increased 4.2% year over year to $225 million. The rise was primarily attributable to a year-over-year increase in revenues from advertising inventory sold on behalf of other video distributors.
Other Segment
Other revenue was $58 million, up 5.5% year over year.
Subscriber Statistics
During the second quarter of 2011, Time Warner Cable lost 74,000 Revenue Generating Units, including a net deletion of 16,000 Primary Services Unit. At the end of the reported quarter, Residential Video subscribers were 12.067 million, down 130,000 sequentially. Commercial Video subscribers were 168,000, up 2,000 sequentially.
Residential High-speed Data subscribers were 9.703 million, up 54,000 sequentially. Commercial High-speed Data subscribers were 359,000, up 13,000 sequentially. Residential Digital Phone subscribers were 4.489 million, up 32,000 sequentially. Commercial Digital Phone subscribers were 136,000, up 13,000 sequentially.
In the previous quarter, Time Warner Cable added 38,000 Triple play subscribers to 3.801 million, lost 21,000 Double play subscribers to 4.865 million, also lost 91,000 Single play subscribers to 5.788 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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