At the tail end of last week, the nation's second-largest cable company, Time Warner Cable (UNKNOWN:TWC.DL), delivered its most recent earnings. While the report was overall encouraging, the most interesting trend may have been in the video subscriber segment, which has been on a near-straight two-year decline.
All in all, residential subscriber growth saw its best quarter in five years, while servicing small businesses remains a pocket of growth for Time Warner Cable and its peers. Investors reacted mutedly, perhaps because of the pending buyout from larger rival Comcast (NASDAQ:CMCSA), but this was nonetheless a strong showing from the company, as evidenced below.
The recent trend for most of the cable industry has been a steady (sometimes increasing) decline in video and phone subscribers, while Internet and small business generates growth. That was essentially the story for Time Warner Cable's recently ended fiscal first quarter, though things actually look the best they have in years for the company.
Residential subscriber growth hit a five-year high point with net additions of 148,000 customer relationships. The top line ticked up just 2% to $5.58 billion, and free cash dipped down nearly 5%, but the company did deliver an impressive 26% gain in adjusted EPS to $1.78. The reason for this is likely a focus on promotional-heavy bundling services. Time Warner Cable gained such appealing numbers by offering great introductory deals, so sales didn't see the same gains.
Business services sales remained a strong point, climbing 25% in the quarter.
The view from above
Some analysts remain concerned that Time Warner Cable's turnaround prospects are challenged. Video subscriber attrition reversed a two-year trend of increasing losses quarter after quarter, but the company still has a hole in the boat that needs to be patched. The proposed merger with Comcast may be the fix.
The theory behind cable consolidation is that a larger market share implies greater pricing power with the content owners. As many know, cable companies are in a constant state of warfare with studios and broadcasters over fees, often resulting in blackout periods that enrage customers. If Comcast joins hands with Time Warner Cable (and now Charter Communications, as it looks to be), the company will be an absolute juggernaut in the space, dwarfing its rivals and presenting fresh competition to the invading Internet streaming businesses.
Time Warner Cable CEO Rob Marcus is correct in sticking to the belief that this merger is the best way to move forward for the company and its shareholders.
All in all, existing investors should keep their holdings, while prospective ones may look to Comcast or Charter for their cable investments.
Michael Lewis has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.