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Time Warner Cable Reports 2014 Fourth-Quarter and Full-Year Results

Release Date: 01/29/2015

Best Fourth-Quarter Subscriber Performance in at Least Seven Years

67,000 Customer Relationship Net Additions in Q4; 447,000 PSU Net Additions, Driven by Record Q4 Triple Plays

$4.1 Billion 2014 CapEx, Reflecting Greater Investment in TWC Maxx, Improved Customer Experience and Network Expansion

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NEW YORK, January 29, 2015 – Time Warner Cable Inc. (NYSE: TWC) today reported financial results for its fourth quarter and full year ended December 31, 2014.

Time Warner Cable Chairman and CEO Rob Marcus said: “Our fourth quarter marked a strong finish to a really positive year for Time Warner Cable. As a result of record Q4 subscriber net adds and the investments we made all year in our plant, products and customer care, we enter 2015 with tremendous operating momentum."

Marcus added, “We continue to expect the Comcast merger to close soon; until then, we remain one hundred percent committed to executing our plan."

SELECTED CONSOLIDATED FINANCIAL RESULTS

HIGHLIGHTS

Financial Highlights

  • Full-year 2014 revenue grew 3.1% year over year with Business Services revenue up 22.8%, residential high-speed data revenue up 10.4% and advertising revenue up 10.6%.
  • Fourth-quarter 2014 revenue grew 3.8% year over year with Business Services revenue up 22.6%, residential high-speed data revenue up 7.4% and advertising revenue up 19.4%.
  • Full-year Adjusted OIBDA was $8.2 billion — up 3.1% year over year. Operating Income of $4.6 billion increased 1.1% year over year.
  • Fourth-quarter Adjusted OIBDA was $2.1 billion — up 5.6% year over year. Operating Income of $1.2 billion increased 4.5% year over year.
  • Full-year Adjusted Diluted EPS increased 14.4% to $7.56. Diluted EPS increased 7.0% to $7.17.
  • Fourth-quarter Adjusted Diluted EPS increased 11.5% to $2.03. Diluted EPS increased 3.2% to $1.95.

Operational Highlights

  • Fourth-quarter subscriber performance in each category below was the best in at least seven years.
    • Total customer relationship net additions of 67,000
    • Residential high-speed data net additions of 168,000
    • Residential voice net additions of 295,000 – best fourth quarter ever
    • Residential video net declines of 38,000
    • Residential triple play net additions of 273,000 – best fourth quarter ever
  • Full-year capital expenditures of $4.1 billion reflect the Company’s accelerated investment in “TWC Maxx,” improved customer experience and network expansion.
    • The roll out of TWC Maxx, including the “all digital” conversion and Internet speeds of up to 300 Mbps, was completed in New York City and Los Angeles during 2014. The Company expects to complete the roll out in Austin, Texas in early 2015 and plans to expand TWC Maxx to Charlotte, Dallas, Hawaii, Kansas City, Raleigh, San Antonio and San Diego in 2015.
    • TWC continued to improve its customers’ experience by deploying more than eight million new set-top boxes, digital-to-analog converters and advanced modems in customers’ homes during 2014.
    • During 2014, TWC added nearly 70,000 commercial buildings to its network, ending the year with connectivity to 930,000 commercial buildings.
  • TWC achieved record “on-time” performance with technicians arriving at more than 97% of customer appointments within the designated one-hour appointment window during the fourth quarter.

CONSOLIDATED REVENUE AND PROFITABILITY RESULTS

Revenue for the fourth quarter and full year of 2014 increased 3.8% and 3.1%, respectively, year over year as a result of revenue growth at all segments.

Adjusted Operating Income before Depreciation and Amortization (“Adjusted OIBDA”) for the fourth quarter and full year of 2014 increased 5.6% and 3.1%, respectively, driven by revenue growth, partially offset by year-over-year increases in operating expenses of 2.8% and 3.1%, respectively.  

For the fourth quarter, the increase in operating expenses was primarily due to the following (each of which is discussed further below under “Detailed Segment Results”):

  • higher third-party programming costs at the Residential Services segment;
  • higher programming costs associated with SportsNet LA, a regional sports network carrying the Los Angeles Dodgers’ baseball games and other sports programming, at the Residential Services segment;
  • higher customer care costs at the Residential Services segment;
  • growth in costs associated with advertising inventory sold on behalf of other video distributors at the Other Operations segment;
  • growth in sales and marketing costs at the Business Services segment; and
  • higher technical operations costs at the Residential Services segment.

These increases were partially offset by a decline in voice costs at the Residential Services and Business Services segments and lower sales and marketing costs and bad debt expense at the Residential Services segment.

For the full year, the increase in operating expenses was primarily due to the following (each of which is discussed further below under “Detailed Segment Results”):

  • higher third-party programming costs at the Residential Services segment;
  • increased programming and content costs associated with SportsNet LA at the Residential Services and Other Operations segments;
  • growth in sales and marketing costs at the Residential Services and Business Services segments;
  • growth in costs associated with advertising inventory sold on behalf of other video distributors at the Other Operations segment; and
  • higher customer care costs at the Residential Services segment.

These increases were partially offset by a decline in voice costs at the Residential Services and Business Services segments.

The growth in total operating costs and expenses was reduced by a decrease in pension expense of $32 million and $124 million for the fourth quarter and full year of 2014, respectively.

Operating Income for the fourth quarter and full year of 2014 increased 4.5% and 1.1%, respectively, primarily due to higher Adjusted OIBDA, partially offset by higher depreciation and, for the full year, higher merger-related and restructuring costs. Merger-related and restructuring costs for the fourth quarter of 2014 included $35 million of Comcast merger-related costs and $3 million of restructuring costs primarily associated with employee terminations and other exit costs. Merger-related and restructuring costs for the full year of 2014 included $195 million of Comcast merger-related costs, $3 million of DukeNet Communications merger-related costs and $27 million of restructuring costs primarily associated with employee terminations and other exit costs.

DETAILED SEGMENT RESULTS

Residential Services

For both the fourth quarter and full year, Residential Services revenue increased as a result of an increase in high-speed data revenue, partially offset by decreases in video and voice revenue.

  • The growth in residential high-speed data revenue was the result of an increase in average revenue per subscriber, primarily due to increases in prices and equipment rental charges and a greater percentage of subscribers purchasing higher-priced tiers of service, as well as growth in high-speed data subscribers.
  • Residential video revenue decreased primarily due to a year-over-year decline in video subscribers, partially offset by an increase in average revenue per subscriber. The increase in average revenue per subscriber was primarily the result of price increases and higher premium network revenue (which, for the full year of 2013, was reduced by approximately $15 million of subscriber credits issued in the third quarter in connection with a temporary blackout of Showtime resulting from a dispute with CBS), partially offset by lower transactional video-on-demand revenue.
  • Residential voice revenue decreased due to lower average revenue per subscriber offset, in part, by growth in voice subscribers.

Selected Residential Services Financial Results

Fourth-quarter 2014 Adjusted OIBDA decreased, driven by a 1.8% increase in operating costs, partially offset by the increase in revenue discussed above. The increase in operating costs was the result of increases in programming costs, customer care costs and technical operations costs, partially offset by lower other operating costs and sales and marketing costs.

  • Programming costs (which include intercompany expense from the Other Operations segment for programming costs associated with the Company’s Los Angeles Lakers’ regional sports networks, local sports, news and lifestyle channels and, beginning in 2014, SportsNet LA) grew 7.6% to $1.3 billion primarily due to an increase in average monthly programming costs per video subscriber, partially offset by a decline in video subscribers.  Average monthly programming costs per residential video subscriber grew 12.5% year over year to $39.03 for the fourth quarter of 2014, primarily driven by contractual rate increases and the carriage of SportsNet LA.
  • Customer care costs increased 11.6% to $183 million primarily due to headcount growth and increased call volume, reflecting the Company’s continued investments to improve the customer experience.
  • Technical operations costs were up 3.6% to $349 million primarily due to higher compensation costs per employee, headcount growth and increased maintenance costs, each of which reflected the Company’s continued investments to improve the customer experience.
  • Other operating costs decreased 25.5% to $161 million primarily due to declines in voice costs, which decreased $37 million driven by the in-sourcing of voice transport, switching and interconnection services, and lower bad debt expense.
  • Sales and marketing costs decreased 5.3% to $357 million primarily due to decreased marketing expense, partially offset by sales and retention headcount growth and higher compensation costs per employee.

Full-year 2014 Adjusted OIBDA decreased, driven by a 1.1% increase in operating costs, partially offset by the increase in revenue discussed above. The increase in operating costs was the result of increases in programming costs, sales and marketing costs and customer care costs, partially offset by lower other operating costs.

  • Programming costs grew 4.7% to $5.1 billion primarily due to an increase in average monthly programming costs per video subscriber, partially offset by a decline in video subscribers. Average monthly programming costs per residential video subscriber grew 11.1% year over year to $38.49 for the full year of 2014, primarily driven by contractual rate increases and the carriage of SportsNet LA, partially offset by lower transactional video-on-demand costs. For the full year of 2013, programming costs were reduced by approximately $20 million due to changes in cost estimates for programming services primarily resulting from contract negotiations, changes in programming audit reserves and certain contract settlements.
  • Sales and marketing costs increased 5.3% to $1.5 billion primarily due to sales and retention headcount growth and higher compensation costs per employee.
  • Customer care costs increased 7.6% to $705 million primarily due to headcount growth and increased call volume, reflecting the Company’s continued investments to improve the customer experience.
  • Other operating costs decreased 24.3% to $730 million primarily due to declines in voice costs, which decreased $216 million driven by the in-sourcing of voice transport, switching and interconnection services, and lower bad debt expense.

Residential Services Subscriber Metrics

Business Services

Business Services revenue in the fourth quarter and full year of 2014 included revenue from DukeNet (acquired on December 31, 2013) of $29 million and $116 million, respectively. Excluding the impact of DukeNet, Business Services revenue growth for both the fourth quarter and full year was primarily due to increases in high-speed data and voice subscribers and growth in cell tower backhaul revenue.

Selected Business Services Financial Results

For both the fourth quarter and full year, the increase in Adjusted OIBDA was driven by growth in revenue, partially offset by an increase in operating costs of 17.0% and 16.4%, respectively. The growth in operating costs was primarily due to increased headcount and higher compensation costs per employee, as well as costs associated with DukeNet, partially offset by lower voice costs due to the in-sourcing of voice transport, switching and interconnection services.

Business Services Subscriber Metrics

Other Operations

For both the fourth quarter and full year, advertising revenue increased primarily due to growth in political advertising revenue, as well as, for the full year, higher non-political revenue from advertising inventory sold on behalf of other video distributors. Political advertising revenue was $61 million and $113 million in the fourth quarter and full year of 2014, respectively, compared to $7 million and $28 million in the fourth quarter and full year of 2013, respectively.

For both the fourth quarter and full year, other revenue increased primarily due to affiliate fees from the Residential Services segment as well as other distributors of the Los Angeles regional sports networks

Selected Other Operations Financial Results

For the fourth quarter, the increase in Adjusted OIBDA was driven by growth in revenue, partially offset by an increase in operating costs of 8.1%, primarily related to growth in costs associated with advertising inventory sold on behalf of other video distributors.

For the full year, the decrease in Adjusted OIBDA was driven by an increase in operating costs of 28.1%, primarily related to SportsNet LA content costs and growth in costs associated with advertising inventory sold on behalf of other video distributors, partially offset by growth in revenue.

Shared Functions

Operating costs associated with broad “corporate” functions (e.g., accounting and finance, information technology, executive management, legal and human resources) or functions supporting more than one reportable segment that are centrally managed (e.g., facilities, network operations, vehicles and procurement) as well as other activities not directly attributable to a reportable segment increased 1.6% year over year to $742 million for the fourth quarter of 2014 and 0.3% to $2.9 billion for the full year of 2014. For both the fourth quarter and full year, this increase was driven by increased maintenance expense, partially offset by operating efficiencies, including decreased headcount.

CONSOLIDATED NET INCOME

Fourth-quarter 2014 Net Income Attributable to TWC Shareholders was $554 million, or $1.96 per basic common share and $1.95 per diluted common share, compared to $540 million, or $1.92 per basic common share and $1.89 per diluted common share, in the prior year quarter. Full-year 2014 net income attributable to TWC shareholders was $2.0 billion, or $7.21 per basic common share and $7.17 per diluted common share, compared to $2.0 billion, or $6.76 per basic common share and $6.70 per diluted common share, in the prior year.

Fourth-quarter Adjusted Net Income Attributable to TWC Shareholders and Adjusted Diluted EPS, which exclude merger-related and restructuring costs, certain tax matters and other items affecting the comparability of TWC’s results for 2014 and 2013 (detailed in Note 2 to the accompanying consolidated financial statements), were $577 million and $2.03, respectively, for the fourth quarter of 2014 compared to $520 million and $1.82, respectively, for the fourth quarter of 2013. These increases were primarily due to higher Operating Income and lower interest expense, net, partially offset by higher income tax provision.

Full-year Adjusted net income attributable to TWC shareholders and Adjusted Diluted EPS, which exclude merger-related and restructuring costs, certain tax matters and other items detailed in Note 2, were $2.1 billion and $7.56, respectively, for 2014 compared to $1.9 billion and $6.61, respectively, for 2013. These increases were primarily due to higher Operating Income and lower interest expense, net, partially offset by higher income tax provision.

Additionally, Adjusted Diluted EPS for the full year of 2014 benefited from lower average common shares outstanding as a result of share repurchases under the Company’s stock repurchase program prior to its suspension in February 2014 in connection with the announcement of the Company’s merger with Comcast.

SELECTED BALANCE SHEET AND CASH FLOW INFORMATION

Free Cash Flow for the full year of 2014 decreased 9.9% to $2.3 billion from $2.6 billion in 2013, due mainly to an increase in capital expenditures, partially offset by an increase in cash provided by operating activities. Capital Expenditures, which totaled $4.1 billion in 2014, increased primarily due to the Company’s investments (including TWC Maxx) to improve network reliability, upgrade older customer premise equipment and expand its network to additional residences, commercial buildings and cell towers. Cash Provided by Operating Activities for the full year of 2014 was $6.4 billion, a 10.4% increase from 2013. This increase was primarily driven by lower income tax payments, higher Adjusted OIBDA and lower interest payments, partially offset by an increase in working capital requirements. Income tax payments benefited from certain capital expenditure-related deductions, including the tangible repair regulations (e.g., de minimus expensing) released in late 2013, partially offset by the continued reversal of bonus depreciation benefits recorded in prior years.

Net Debt, which totaled $23.0 billion as of December 31, 2014, decreased from December 31, 2013 as Free Cash Flow more than offset the cash used for dividends and share repurchases (prior to the suspension of the stock repurchase program in February 2014 in connection with the announcement of the Company’s merger with Comcast).

Non-GAAP Financial Measures

The Company refers to certain financial measures that are not presented in accordance with U.S. generally accepted accounting principles (“GAAP”), including OIBDA, Adjusted OIBDA, Adjusted net income attributable to TWC shareholders, Adjusted Diluted EPS and Free Cash Flow. Refer to Note 4 to the accompanying consolidated financial statements for a discussion of the Company’s use of non-GAAP financial measures.

About Time Warner Cable

Time Warner Cable Inc. (NYSE: TWC) is among the largest providers of video, high-speed data and voice services in the United States, connecting 15 million customers to entertainment, information and each other. Time Warner Cable Business Class offers data, video and voice services to businesses of all sizes, cell tower backhaul services to wireless carriers and enterprise-class, cloud-enabled hosting, managed applications and services. Time Warner Cable Media, the advertising sales arm of Time Warner Cable, offers national, regional and local companies innovative advertising solutions. More information about the services of Time Warner Cable is available at www.twc.com, www.twcbc.com and www.twcmedia.com.

Additional details on financial and subscriber metrics are included in the Trending Schedules posted on the Company’s Investor Relations website at www.twc.com/investors.

Information on Conference Call

Time Warner Cable’s earnings conference call can be heard live at 8:30 am ET on Thursday, January 29, 2015. To listen to the call, visit www.twc.com/investors.

Caution Concerning Forward-Looking Statements

This document includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations or beliefs, and are subject to uncertainty and changes in circumstances. Actual results may vary materially from those expressed or implied by the statements herein due to changes in economic, business, competitive, technological, strategic and/or regulatory factors, and other factors affecting the operations of Time Warner Cable Inc., including its proposed merger with Comcast Corporation. More detailed information about these factors may be found in filings by Time Warner Cable Inc. with the Securities and Exchange Commission, including its most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Time Warner Cable is under no obligation to, and expressly disclaims any such obligation to, update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.

Contacts

Corporate Communications

Bobby Amirshahi (212) 364-8292

Eric Mangan (212) 364-8297

Investor Relations

Tom Robey (212) 364-8218

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