TWC Maps Out Upgrade Plans

Feb. 5, 2014
Time Warner Cable (NYSE:TWC) came out swinging last week with the announcement of a 15% increase ...
Time Warner Cable (NYSE:TWC) came out swinging last week with the announcement of a 15% increase in dividend to $3 per share on an annualized basis and the reveal of a three-year plan (2014-2016) intended to revitalize residential services, expand business services and manage costs.

"We have terrific assets, a world-class team and a well-architected operating plan. And we are confident in our ability to drive growth and create more value for our shareholders," said Robert Marcus, TWC chairman and CEO, during a conference call to discuss the company's Q4 and year-end financials.

Discussion of shareholder value has been front and center lately in light of Charter Communications' (NASDAQ:CHTR) recent bid to buy TWC for approximately $132.50 per share. Marcus reiterated previous statements that this amount "substantially undervalues" TWC. He and other company execs tried to hammer home the point that not only is Time Warner Cable in a good place today, but it is more likely to add value by executing its operating plan than if it were combined with Charter.

"The facts are that in almost every regard, whether that's residential, video, and high-speed data penetration, number of HD channels offered, WiFi hotspots, commercial buildings on our network, you name it, Time Warner Cable is better positioned than Charter, reflecting years of innovation and investment. And that certainly provides a very strong foundation for our go-forward operating plan," Marcus said.

The first element of the plan, to revitalize residential services, is three-pronged: to continue subscriber acquisition and retention efforts, to improve customer service, and to roll out next-gen video products.

By the end of 2014, TWC plans to have its cloud-based user guide on 6 million set-tops and will take navigation even further with initial deployment of a new product on six-tuner DVRs. VOD capacity will be expanded to 75,000 hours nationwide, and more advanced IP apps are in the works. "This much more competitive video product is key to our effort to meaningfully improve video subscriber performance," Marcus said.

In 2014, the company also plans to launch TWC Maxx in New York City (which has already undergone an all-digital conversion) and Los Angeles (which will begin the conversion process this year). For starters, this means an increase in speeds to 50 Mbps for the standard Internet tier, 100 Mbps for Turbo, and 300 Mbps for Ultimate.

"I think our customers are going to be blown away," Marcus said. The following two years, 2015-2016, will see the expansion of TWC Maxx to the rest of the MSO's footprint.

The second element of the overall operating plan is to make business services a $5 billion business for TWC by 2018. This will be accomplished by scaling the small business segment, by building a portfolio for mid-market and larger businesses that includes next-gen Internet services, and continuing to grow carrier services.

"We are also focused like a laser on harvesting the market opportunities that we expand to," said Philip Meeks, TWC EVP and COO of business services.

As an example, he noted that with a 2012 investment of $10 million, TWC connected 801 new buildings. Within 18 months, the company had gained 2,500 new business customers in those buildings, representing $750,000 in recurring monthly revenue. "The good news is this is a repeatable process, and we will continue to build and harvest customers," Meeks said.

The third part of the strategic operating plan is cost management, but all of these plans will take money. To pay for them, TWC will increase total capital spending to $3.7 billion to $3.8 billion per year over the next three years. This includes new CPE (digital-to-analog converters, set-top boxes, modems, and wireless gateways) as well as $500 million for connecting buildings and cell towers. Additionally, the company will invest an incremental $100 million in operating expense for proactive maintenance and TWC Maxx rollout.

On the flip side, TWC believes this investment will lead to an additional $3.5 billion in annual revenue over the next three years and $1.4 billion of annual adjusted OIBDA (operating income before depreciation and amortization), said Arthur Minson, TWC's CFO and EVP. This could mean $25.7 billion of total revenue for TWC in 2016 with $9.4 billion adjusted OIBDA.

Incidentally, Minson noted that he returned to TWC after a stint with AOL (NYSE:AOL) because he saw a residential business that was "much healthier than the public was seeing," and high-growth, high-margin potential from the business side.

"I'm obviously not the only one who saw this opportunity. The folks at Charter and Liberty are very smart guys, and they think they see a chance to force a trade before the public realizes what we can achieve with our stand-alone plan," Minson said.

Monta Monaco Hernon is a free-lance writer. She can be reached at [email protected].