Time Warner Cable (UNKNOWN:TWC.DL) recently managed to add cable subscribers for the first time in nine years. Yet the video entertainment delivery business, which accounts for just over half of TWC's revenue, was still a drag on operating performance: Sales fell by 1% even as rising programming costs pushed profits lower.
What has kept the cable giant on a solid overall growth pace, though, was impressive growth in its best business segment: high-speed data, which makes up roughly 35% of sales.
About the segment
Time Warner delivers Internet access to customers at speeds ranging from 2 to 300 megabits per second. It also carries a "light" option that caps users at different data download levels (like 5 gigabytes in a given month). In these markets, it competes with other cable giants, with DSL carriers, and in some cases with advanced fiber-optic networks from the likes of Alphabet and its Google Fiber.
In the last few years, TWC's data business has become its fastest-growing, most profitable segment. Sales rose by 9% in 2015 after spiking by 10% the prior year. The company now serves 13 million high-speed customers, for a 9% jump over the prior year. In contrast, the cable business managed the tiniest of increases last year and its customer base is down to 10.8 million from a peak of 13 million in 2008.
Why it's growing
As the demands for data speeds increase (thanks to ever-rising demand for video content), Time Warner is finding it easier to collect more revenue by upgrading its service and pushing add-ons like equipment rentals. In fact, those two trends produced an uptick TWC's overall average monthly revenue to $128 last quarter, despite declines in the cable side of the business. For Internet alone, most users now pay close to $50 per month, up from $44 per month two years ago.
These positive developments help take most of the sting off of those pesky video defections. As more TV fans opt out of cable packages and instead sign up for Internet-based content from companies like Netflix, TWC can protect the customer relationship, at least on the high-speed data side.
While the cable business has to deal with the spiking cost of programming (content expenses rose 10% last year), high-speed data's key costs come in the form of ramped-up capital spending to support higher download speeds. TWC shelled out $946 million in capex last quarter, 9% more than in the prior-year period. Investors can expect those infrastructure costs to keep marching higher as the cable giant rolls out its Maxx digital service to additional major markets this year.
Due to its proposed merger with Charter Communications, Time Warner Cable hasn't provided investors with specific operating targets for any of its business segments. However, it's clear that high-speed data will be a leading division over the next few years.
TWC added 1 million Internet customers to its rolls over the last 12 months, which helped push overall customer relationships up by over 600,000. "That's not just our best ever," CEO Rob Marcus said in a recent conference call with investors. "It's nearly 3 times the previous record."
Besides improving growth trends, here's an even more encouraging data point for this business: Fewer than half of TWC's high-speed data customers subscribe to its ultra-fast tiers, those delivering speeds in excess of 50 megabits per second. That gives the company a huge base of existing users to upgrade over the coming years, even as it works to snag customers from rival cable and DSL giants.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Demitrios Kalogeropoulos owns shares of NFLX. The Motley Fool owns shares of and recommends GOOG, GOOGL,and NFLX. 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.