Free Falling: TWC Guidance Hurts Stock; Sports Deals Not Part of Margin Miss

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The first MSO 4Q earnings report is in, and Wall St isn’t happy. But it’s not the quarterly results spooking investors. Time Warner Cable shares closed down more than 11% after the company gave soft guidance for the year. TWC expects ’13 adjusted earnings per share to be in the $6.33-$6.61 range, below Street expectations of $6.88. Wells Fargo identified the big downside surprise in guidance as OIBDA showed a margin contraction of 50-100bps. "It sounds like the biggest driver is programming expense, which is expected to be up 10% per sub versus our 8.7%," the firm said in a research note. "That said, another material driver consistently mentioned was the lack of high margin political advertising in 2013." Time Warner CEO Glenn Britt said programming costs have risen at more than 3x the rate of inflation and again warned that each net would be closely examined as contracts expire. The MSO wants to "drop or reposition those that in our judgment do not add to the price value relationship of our packages," he said. Can you talk about expensive programming and not mention the billions TWC spent on the Lakers and Dodgers deals? Britt acknowledged that the deals weren’t cheap, but "we do think they are better than the potential alternatives" because they stabilize the cost over time. CFO Irene Esteves said the RSN deals are not the reason for the margin decline, saying the impact wouldn’t be felt until ’14. Pres/COO Rob Marcus also chimed in on programming, saying watching the bottom line doesn’t mean not adding programming that "yields real value to our customers." He noted the launches of NFL Net, RedZone and the Pac-12 Nets. For 4Q, revenue was up 9.9% TO $5.5bln—a figure the Lakers RSN helped. EBITDA also rose, +5.6% TO $2bln. Basic losses of 129K were flat YOY, but better than 3Q’s 140K loss. Marcus called video a "disappointment," saying more work must be done. HSD adds dropped to 75K from 117K a year ago, which mgmt attributed to the addition of a cable modem rental fee, which drove a 6.3% increase in residential HSD ARPU for 4Q. On the plus side, Marcus said more than 100% of Q4 net adds were to 30 and 50Mbps HSD tiers. Phone was a better story with 34K adds, about on pace with a year ago. "In 2013, we’re redoubling our efforts to get, grow and keep customers," Marcus said, noting last week’s launch of new pricing and packaging architecture and more aggressive up-selling. Also in the works: updates to apps to bring more content and function to more devices as well as a cloud-based user interface for IP set-tops. Marcus said the changes are slated for introduction in the 2nd half of the year. More WiFi—double the current number of hotspots—also is on the way. ISI Group expected share retraction on Thurs’ report but reiterated its "buy" rating, predicting TWC will be in the "penalty box" until investors are convinced higher costs are worth it. "We believe the Business Services growth should help allay some of the expense fears, but with various expenses increasing for the LA RSNs, and a new sports network for the LA Dodgers on the way, investors will be looking for rapid distributor carriage and advertising growth to help support the investments," analysts said.

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