Time Warner's Soft 2nd Quarter Picked Up By Phone

Time Warner Cable reaffirmed its 2007 outlook this morning while reporting its 2nd quarter results. The operator, like Comcast, lost basic subscribers in the 2nd quarter: 38,000 in its acquired systems and 19,000 in its legacy systems for 57,000 total in the quarter.

Analysts were projecting no more than 11,000 basic video sub losses for the quarter, but Time Warner Cable executives on this morning’s earnings call said 80% of basic sub defections occurred in acquired markets such as Los Angeles, a former Adelphia system where it got off to a rocky start and ended up changing its SoCal management team and Dallas, which it acquired in an Adelphia-triggered swap with Comcast.

In contrast, Time Warner Cable’s Buffalo market, once Adelphia’s flagship system, markedits first anniversary under TWC’s flag today by saying the operator’s investments over the past 12 months have been welcomed and have "moved the area forward by about 3 years." Buffalo subscribers received digital voice service in June to augment the company’s introduction this past year of HDTV, DVRs and Road Runner high-speed online service.

The MSO’s 2nd quarter high-speed data (Internet) numbers also lagged, which company officials attributed to 2nd quarter’s traditional seasonal softness and the slumping housing market. The MSO added 188,000 HSD subscribers in 2nd quarter, coming in below analysts’ projected 254,000 high-speed sub gains.

TWC also added 184,000 digital cable subscribers, but its real performer was digital phone, with 241,000 new digital voice customers making the service the company’s fastest-growing product line.

Company execs on its earnings call acknowledged the results were disappointing—while pointing out TWC’s legacy systems have posted subscriber gains in eight of the last ten quarters—and vowed to offer lower-priced bundles (which it declined to detail) to attract price-sensitive customers to bolster its subscriber ranks.

TWC’s net income fell 7.2% (to $272 million) over 2nd quarter 2006, while revenue jumped 59% in the quarter to $4.01 billion, from $2.52 billion, including $1 billion from system acquisitions from the Adelphia- and Comcast system acquisitions that closed on July 31, 2006. OIBDA (Operating Income before Depreciation and Amortization) increased 52% to $1.4 billion in the 2nd quarter.

Other highlights to upsell its subscriber base:

• The company said it will expand a local-only VoIP option and an in-state only calling plan to sweeten its voice offering. The local-only option is aimed at the 15% of customers who don’t make long-distance calls and has already rolled out four divisions in the past month. TW has launched unlimited in-state calling to 2/3 of its divisions, which is aimed at the 30% of customers who spend $25-$44 per month on landline and/or second-line phone service. TWC also plans to add an international calling plan in the third quarter.

• TWC is also creating four standard tiers of high-speed service: Lite (768 Kbps downstream), Basic (1.5 Mbps), Standard (7-10 Mbps) and Turbo (10 Mbps or faster).

• The company plans to expand its Enhanced TV quartet of time-shifting, no-ad-skipping, network DVR-based advanced video features: Start Over, which replays a program from the top without recording it; Quick Clips, which ports broadband video onto digital cable; Look Back, which allows programs to be replayed within 24 hours of their premiere; and Catch Up, which offers VOD-like marathons of series’ episodes so viewers can, well, catch up with shows they’ve missed. Not yet available: Look Back, which will be trialed this year, and Catch Up, which is "coming soon." Half of TWC’s divisions will have Start Over (which launched in South Carolina in 2005 and last summer expanded to Greensboro, NC; Rochester, NY; and San Antonio, TX) and Quick Clips (which launched in Columbia, SC) by year-end.

• Separately, the operator confirmed that it’s bidding on Insight Communications, which recently extended its deadline for bids. Time Warner Cable also noted that Sprint Nextel has pulled out its 5% stake in SpectrumCo, the joint venture between Sprint and cable operators (TWC, Comcast, Cox Communications and Bright House Networks) to purchase spectrum in the FCC’s AWS auction last year.

• Parent company Time Warner Inc. today reaffirmed its 2007 outlook and reported 2nd quarter earnings, with CEO Dick Parsons reiterating his support for Time Warner Cable on the earnings call.