TWC Beats on Bottom Line

Time Warner Cable Inc. ( TWC - Analyst Report ) reported fourth-quarter 2012 financial results, where the bottom line beat the Zacks Consensus Estimate while the top line missed the same.

Quarterly adjusted (excluding special items) earnings per share of $1.57 beat the Zacks Consensus Estimate of $1.56. Quarterly GAAP net income was $513 million or $1.68 per share against $564 million or $1.75 per share in the prior-year quarter. At $5,485 million, quarterly total revenue fell short of the Zacks Consensus Estimate of $5,500 million, but was up 9.9% year over year.

On an annualized basis total revenue increased 8.7% to $21,386 million while adjusted earnings per share increased 22.6% to $5.75. The outperformance was mainly attributable to improved advertising sales, strong high-speed data revenue growth and successful integration of Insight Communications.

Quarterly adjusted operating income before depreciation and amortization (OIBDA) climbed 5.6% year over year to $1,994 million. GAAP operating income grew 13.6% year over year to $1,169 million. During the fourth quarter of 2012, Time Warner Cable repurchased 6.0 million shares for a total consideration of $571 million and also paid $171 million in dividends.

During the reported quarter, Time Warner Cable generated $1,410 million of cash from operations compared with $1,344 million in the prior-year period. Free cash flow in the fourth quarter of 2012 was $587 million compared with $391 million in the year-ago quarter.

At the end of the fourth quarter of 2012, Time Warner Cable had $3,454 million in cash and marketable securities compared with $5,177 million at the end of 2011. Long term debt at the end of the reported quarter was $25,171 million against $24,320 million at the end of 2011. At the end of 2012, debt-to-capitalization ratio was 0.77 compared with 0.76 at the end of 2011.

Residential Services Segment

Quarterly total revenue was $4,577 million, up 6.8% year over year. Within the segment, video revenue was $2,687 million, up 2.2% year over year. High-speed data revenue was $1,346 million, up 17.2% year over year. Voice revenue was $527 million, up 6.5% year over year. Other revenue was $17 million, up 30.8% year over year.

Business Services Segment

Quarterly revenue was $515 million, up 25.9% year over year. Within the segment, video revenue was $83 million, up 12.2% year over year. High-speed data revenue was $245 million, up 25.0% year over year. Voice revenue was $87 million, up by a substantial 52.6% year over year. Wholesale transport revenue was $52 million, up 18.2% year over year. Other revenue was $48 million, up 26.3% year over year.

Advertising Segment

Advertising revenue surged 29.3% year over year to $313 million.

Other Segment

Other revenue came in at $80 million, up 37.9% year over year.

Subscriber Statistics

At the end of 2012, Residential Video subscribers’ base was 12.030 million. Time Warner Cable lost 129,000 residential video subscribers in the previous quarter. Commercial Video subscribers’ base was 188,000. Residential High-speed Data subscribers’ base was 10.935 million. Time Warner Cable added 75,000 residential High-Speed Data subscribers. Commercial High-speed Data subscribers’ base was 460,000. The company also added 14,000 commercial High-speed Data subscribers. Residential voice subscribers’ base was 5.024 million. Commercial voice subscribers’ base was 224,000. The company added 12,000 commercial voice subscribers.

In the fourth quarter, Time Warner Cable gained 36,000 Triple play subscribers totaling 4.294 million, lost 34000 Double play subscribers totaling 5.04 million, and also lost 29,000 Single play subscribers totaling 5.907 million.

Our Take

We believe going forward, Time Warner Cable will benefit from the launch of popular sports channels in the US market. Of late, sports entertainment has become a lucrative form to earn revenue for cable MSOs. Time Warner Cable sold the distribution rights to DirecTV ( DTV - Analyst Report ) and AT&T Inc.’s ( T - Analyst Report ) U-Verse, thereby aiding its top-line growth. Additionally, the second largest cable MSO is also planning to hike its rates on the back of multiple deals signed with different sporting majors like Los Angeles Galaxy, Los Angeles Sparks, Los Angeles Lakers and Los Angeles Dodgers. However, loss of its residential video subscribers remains the primary cause of concern for Time Warner Cable as customers are opting for cheaper video streaming service providers like Netflix Inc. ( NFLX - Analyst Report ) Hulu.Com and You Tube.

Time Warner Cable currently carries a Zacks Rank #3 (Hold).