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Time Warner Earnings Hit by Rising Video Costs and Restructuring Charges

Programming Costs and $21m in Charges Drive Earnings Down 1%

Time Warner (NYSE:TWC) kicked off earnings season for cable companies on Thursday, repeating many of the same trends we saw from cablecos in 2Q11. The major themes: video customer losses and data gains continued, while business services served as the key area for growth. While Time Warner increased its top line to near $5b in the quarter, its earnings were off 1% from 3Q10 thanks to merger/restructuring charges and rising video programming costs.

In 3Q11, Time Warner lost another 128k video subs, but the news wasn’t all that bad as losses were actually down from 155k in 3Q10. Offsetting these losses, the cableco added 89k residential high speed Internet customers in 3Q11, bringing its total residential data connections to near 10m. Revenues from high-speed data increased moderately at 7.8% YoY in 3Q11 to $1.12b for Time Warner’s residential services, compensating for a .5% YoY decline in residential video revenues. Time Warner’s ARPU for both video and Internet services rose a modest 3% during the quarter.

In a revision to its revenue presentation, Time Warner provided an additional breakdown of its top line in 3Q11. Offering a clear indication that over-the-top video competitors are impacting on Time Warner’s residential television services, video-on-demand revenues declined 8% YoY, while revenues for premium channels were down around 6%. Its take from DVR services however rose more than 10.3% in 3Q11, again reinforcing that consumers are looking for more flexibility in their television viewing.

While growth in residential revenues has slowed for Time Warner, the outlook for its business services segment is more promising. Business service revenue increased 34.8% YoY in 3Q11 to $387m, aided by its 2Q11 acquisition of Navisite. Even without Navisite’s contributions, business revenues were still up sharply 23% for the quarter.

Despite growing its overall top line 3.7% in 3Q11 to $4.91m, Time Warner’s bottom line suffered thanks to a pair of factors, falling 1% ($4m) to $356m. The first factor, which will remain a drag on earnings for quarters to come, is an increase in video programming costs. The average video programming cost per customer jumped to near $30 in 3Q11, a 7.4% increase, attributable to a change in contractual rates, and higher costs associated with local programming. The company also incurred $21m in merger related and restructuring charges associated with its pending acquisitions of Insight and NewWave and its Navisite purchase.

Given that Time Warner’s acquisition of NewWave will not close until later this year, and that its Insight purchase is slated to close in 2Q12, the question remains: how long will these restructuring charges continue to impact its bottom line? The company indicated it will incur more merger related charges in 4Q11, and will logically continue to take them through the close of its Insight deal. While the company projects cost synergies with the Insight integration, Insight’s expenses and operating cash flow per connection compare unfavorably to Time Warner’s current levels. Once closed, the deals will no doubt benefit Time Warner’s top line, but the impact on earnings remains to be seen.

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