Best Second-Quarter Subscriber Performance in Years
Strong Sequential Revenue and ARPU Growth
“TWC Maxx” Rollout Accelerated to Include Austin, Texas in 2014
Time Warner Cable Inc. (NYSE: TWC) today reported financial results for its second quarter ended June 30, 2014.
Time Warner Cable Chairman and CEO Rob Marcus said: "Time Warner Cable posted another very good quarter. We delivered the best second-quarter subscriber volumes in years, accelerated ARPU growth and made terrific progress on our strategic and operating initiatives. I want to commend our team for remaining laser focused on executing our operating plan, while at the same time working hard to complete our merger with Comcast."
SELECTED CONSOLIDATED FINANCIAL RESULTS
- Second-quarter 2014 revenue grew 3.2% year over year, driven primarily by growth of 22.3% in business services revenue and 12.8% growth in residential high-speed data revenue. Sequential quarterly revenue growth of $144 million was the highest organic growth in seven years.
- Adjusted Diluted EPS increased 11.8% to $1.89. Diluted EPS increased 7.3% to $1.76.
- Second-quarter 2014 average monthly revenue per residential customer relationship (ARPU) grew 1.7% to $106.98. Residential high-speed data ARPU increased 9.7% to $46.92.
- Overall second-quarter subscriber performance was the best in years.
- Residential customer relationship net declines of 34,000 – best second quarter in five years
- Residential triple play net additions of 42,000 – best second quarter in two years
- Residential high-speed data net additions of 67,000 – best second quarter in four years
- Residential voice net additions of 79,000 – best second quarter in five years
- Residential video net declines of 152,000 – best second quarter in three years
- Business primary service unit and customer relationship net additions of 37,000 and 21,000, respectively – highest quarter ever
- "TWC Maxx" rollout, including conversion to an all-digital network and high-speed data speed increases to as much as 300 Mbps, continues to progress in New York City and Los Angeles and has recently begun in Austin, Texas.
- TWC’s cloud-based guide with an advanced VOD portal was installed on 5.8 million set-top boxes at the end of the second quarter.
- Business Services continued to benefit from the addition of buildings and cell towers to the network, expansion of the sales force and improved sales rep productivity.
- The Company accelerated its pace of investment in advanced set-top boxes, cable modems capable of supporting TWC Maxx speeds, expanded VOD capacity and network reliability.
CHANGES IN BASIS OF PRESENTATION
Effective in the first quarter of 2014, the Company determined it has three reportable segments: Residential Services, Business Services and Other Operations. Additionally, during the first quarter of 2014, the Company revised its categorization of operating costs and expenses to be consistent with how such costs and expenses are presented to management and to provide a more meaningful presentation. The Company has recast its financial information and disclosures for the prior periods to include (i) disclosure of segment results, which are discussed further below in “Detailed Segment Results” and Note 3 to the accompanying consolidated financial statements, and (ii) the revised categorization of operating costs and expenses, which had no impact on total operating costs and expenses, Operating Income or net income attributable to TWC shareholders for any period presented.
CONSOLIDATED REVENUE AND PROFITABILITY RESULTS
Revenue for the second quarter of 2014 increased 3.2% year over year as a result of revenue growth at all segments.
Adjusted Operating Income before Depreciation and Amortization (“Adjusted OIBDA”) for the second quarter of 2014 increased 0.8% driven by revenue growth, partially offset by a 4.5% year-over-year increase in operating expenses.
The increase in operating expenses was primarily due to the following (each of which is discussed further below under “Detailed Segment Results”):
- increased programming and content costs associated with SportsNet LA, a regional sports network carrying the Los Angeles Dodgers’ baseball games and other sports programming, at the Residential Services and Other Operations segments;
- higher third-party programming costs at the Residential Services segment;
- growth in sales and marketing costs at the Business Services and Residential Services segments;
- higher customer care costs at the Residential Services segment; and
- growth in costs associated with advertising inventory sold on behalf of other video distributors at the Other Operations segment;
- 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 $27 million decrease in pension expense.
Operating Income for the second quarter of 2014 decreased 2.0% primarily due to higher merger-related and restructuring costs, partially offset by higher Adjusted OIBDA. Merger-related and restructuring costs for the second quarter of 2014 included Comcast merger-related costs of $49 million (employee retention costs of $40 million and advisory and legal fees of $9 million), DukeNet Communications merger-related costs of $3 million and restructuring costs primarily associated with employee terminations and other exit costs of $9 million.
DETAILED SEGMENT RESULTS
Residential Services revenue increased as a result of an increase in high-speed data revenue, partially offset by decreases in video and voice revenue.
- 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 as a result of price increases.
- 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 voice revenue decreased due to lower average revenue per subscriber.
Selected Residential Services Financial Results
The slight decrease in Adjusted OIBDA was driven by a 1.6% 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 (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 3.9% 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 10.8% year over year to $38.29 for the second quarter of 2014, primarily driven by contractual rate increases and the carriage of SportsNet LA.
- Sales and marketing costs increased 5.4% to $353 million primarily due to headcount growth and higher compensation costs per employee, including customer retention.
- Customer care costs increased 9.4% to $174 million primarily due to higher employee costs.
- Other operating costs decreased 15.9% to $217 million primarily due to declines in voice costs, partially offset by higher bad debt expense. Voice costs decreased $63 million primarily due to the in-sourcing of voice transport, switching and interconnection services.
Residential Services Subscriber Metrics
Business Services revenue growth was primarily due to increases in high-speed data and voice subscribers, organic growth in cell tower backhaul revenue and $29 million of revenue from DukeNet, which was acquired on December 31, 2013.
Selected Business Services Financial Results
The increase in Adjusted OIBDA was driven by growth in revenue, partially offset by an 18.0% increase in operating costs, primarily as a result of an increase in sales and marketing costs due to increased headcount and higher compensation costs per employee, as well as costs associated with DukeNet. This increase was partially offset by lower voice costs due to the in-sourcing of voice transport, switching and interconnection services.
Business Services Subscriber Metrics
Advertising revenue increased primarily due to growth in political advertising revenue. 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
The decrease in Adjusted OIBDA was driven by a 55.6% increase in operating costs, 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.
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 decreased 0.4% year over year to $720 million for the second quarter of 2014. This decrease was driven by operating efficiencies, including decreased headcount.
CONSOLIDATED NET INCOME
Net Income Attributable to TWC Shareholders was $499 million, or $1.77 per basic common share and $1.76 per diluted common share, for the second quarter of 2014 compared to $481 million, or $1.65 per basic common share and $1.64 per diluted common share, for the second quarter of 2013.
Adjusted Net Income Attributable to TWC Shareholders and Adjusted Diluted EPS, which exclude certain items affecting the comparability of TWC’s results for 2014 and 2013 detailed in Note 2 to the accompanying consolidated financial statements, were $536 million and $1.89, respectively, for the second quarter of 2014 compared to $497 million and $1.69, respectively, for the second quarter of 2013. Adjusted Diluted EPS for the second quarter of 2014 benefited year over year from lower average common shares outstanding as a result of share repurchases under the Company’s stock repurchase program, which was suspended in connection with the announcement of the Company’s merger with Comcast.
SELECTED BALANCE SHEET AND CASH FLOW INFORMATION
Free Cash Flow for the first six months of 2014 decreased 21.9% to $1.1 billion from $1.4 billion in the first six months of 2013, due mainly to an increase in capital expenditures, partially offset by an increase in cash provided by operating activities. Capital Expenditures, which totaled $2.1 billion for the first six months of 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 first six months of 2014 was $3.1 billion, a 5.0% increase from the first six months of 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 $24.2 billion as of June 30, 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 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 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 and Presentation Slides 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, July 31st, 2014. 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.