Best Third-Quarter Customer Relationship Performance in Six Years
Best Third-Quarter Sequential Adjusted OIBDA Trend in Eight Years
“TWC Maxx” Speeds of up to 300 Mbps Now Available to Roughly Seven Million Homes in New York City, Los Angeles and Austin, Texas
The “All Digital” Conversion is Now Complete in New York City and Los Angeles
Time Warner Cable Inc. (NYSE: TWC) today reported financial results for its third quarter ended September 30, 2014.
Time Warner Cable Chairman and CEO Rob Marcus said: “We’re executing well against our plan, with solid financial performance and strong subscriber momentum. We continue to expect the Comcast merger to close early in 2015."
SELECTED CONSOLIDATED FINANCIAL RESULTS
- Third-quarter 2014 revenue grew 3.6% year over year with Business Services revenue up 21.9% and residential high-speed data revenue up 10.9%.
- Adjusted OIBDA was $2.1 billion — up 2.4% year over year and flat with Q2 — the best third-quarter sequential performance in eight years. Operating Income of $1.2 billion decreased slightly year over year due to higher depreciation and merger-related costs.
- Business Services operating leverage increased significantly as Adjusted OIBDA growth of 28.5% outpaced revenue growth by 660 basis points.
- Adjusted Diluted EPS increased 10.1% to $1.86. Diluted EPS decreased 4.3% to $1.76.
- Third-quarter 2014 average monthly revenue per residential customer relationship (ARPU) grew 1.4% to $106.58.
- Total customer relationship performance was the best for any third quarter in six years.
- Total high-speed data net additions of 108,000 marked the best third-quarter performance in five years.
- The Company made significant progress in the roll out of “TWC Maxx.” The “all digital” conversion is now complete in New York City and Los Angeles, and Internet speeds of up to 300 Mbps are now available to roughly seven million homes in New York City, Los Angeles and Austin, Texas.
- TWC continued its aggressive investments in CPE to support TWC Maxx and improve the customer experience. Year to date, the Company connected more than five million new set-top boxes, digital-to-analog converters and advanced modems to its network.
- Investments in network reliability and customer care contributed to a more than 12% year-over-year reduction in trouble calls per customer relationship — half a million fewer truck rolls year to date.
- On-time performance within TWC’s company-wide one-hour service windows reached 96% in the third quarter.
- Business Services added more than 16,000 commercial buildings to its network in the third quarter, expanding its serviceable market opportunity by over $250 million per year.
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 third quarter of 2014 increased 3.6% year over year as a result of revenue growth at all segments.
Adjusted Operating Income before Depreciation and Amortization (“Adjusted OIBDA”) for the third quarter of 2014 increased 2.4% driven by revenue growth, partially offset by a 4.2% 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 $31 million decrease in pension expense.
Operating Income for the third quarter of 2014 decreased 0.8% primarily due to higher depreciation and merger-related and restructuring costs, partially offset by higher Adjusted OIBDA. Merger-related and restructuring costs for the third quarter of 2014 included Comcast merger-related costs of $49 million, partially offset by a $1 million reversal of DukeNet Communications merger-related costs and a net $2 million reversal of restructuring costs primarily associated with employee terminations and other exit costs.
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. The increase in average revenue per subscriber was primarily the result of price increases and higher premium network revenue (which, for the third quarter of 2013, was reduced by approximately $15 million of subscriber credits issued in connection with a temporary blackout of Showtime resulting from a dispute with CBS), partially offset by lower transactional video-on-demand 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 voice revenue decreased due to lower average revenue per subscriber offset, in part, by growth in voice subscribers.
Selected Residential Services Financial Results
Adjusted OIBDA was flat, driven by the increase in revenue discussed above, partially offset by a 1.3% increase in operating costs. The increase in operating costs was the result of increases in programming costs, customer care costs and sales and marketing 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 4.7% 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 11.1% year over year to $38.96 for the third quarter 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 third quarter of 2013, programming costs were reduced by $10 million due to changes in cost estimates for programming services primarily resulting from contract negotiations, changes in programming audit reserves and certain contract settlements.
- Customer care costs increased 8.0% to $176 million primarily due to higher employee costs.
- Sales and marketing costs increased 3.3% to $375 million primarily due to headcount growth and higher compensation costs per employee, including customer retention, partially offset by lower marketing activities.
- Other operating costs decreased 20.9% to $185 million primarily due to declines in voice costs, which decreased $55 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 a 12.8% increase in operating costs, primarily as a result of increased headcount and higher compensation costs per employee, as well as costs associated with DukeNet. These increases were 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, as well as higher non-political revenue from advertising inventory sold on behalf of other video distributors. Political advertising revenue was $26 million for the third quarter of 2014 compared to $12 million for the third quarter of 2013. 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 57.9% 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 increased 1.3% year over year to $712 million for the third quarter of 2014. This increase was driven by increased maintenance expense, partially offset 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 third quarter of 2014 compared to $532 million, or $1.86 per basic common share and $1.84 per diluted common share, for the third 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 $527 million and $1.86, respectively, for the third quarter of 2014 compared to $489 million and $1.69, respectively, for the third quarter of 2013. Adjusted Diluted EPS for the third 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 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 first nine months of 2014 decreased 20.6% to $1.5 billion from $1.8 billion in the first nine 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 $3.2 billion for the first nine 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 ffor the first nine months of 2014 was $4.5 billion, a 9.3% increase from the first nine 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 $23.8 billion as of September 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 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, October 30, 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.
Bobby Amirshahi (212) 364-8292
Eric Mangan (212) 364-8297
Tom Robey (212) 364-8218