Time Warner Reticent on Adelphia Integration Pre-Cable Spinoff
Time Warner executives were cagey in a Wed. earnings call with investors about how profitable newly acquired Adelphia cable systems will be this year and what the firm will have to spend upgrading the network to provide VoIP, broadband, VoD and other advanced services. The company updated its outlook for the year, saying it expects to convert 35%-45% of its adjusted operating income before depreciation and amortization into free cash flow. Beyond that, executives declined to speculate on how the Adelphia takeover would affect the operations’ profit margins.
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“There’s a limitation to how much on a forward-looking basis we're comfortable giving,” because the cable unit soon will go public, James Burtson, senior vp-investor relations, said. Pressed by analysts, Time Warner COO Jeffrey Bewkes said he doesn’t think moving to Time Warner Cable’s diffuse management style from Adelphia’s approach, which an analyst characterized as centralized, will affect profit margins. Time Warner will be spending to upgrade Adelphia networks, but its main outlays will be for VoIP, broadband deployment and other improvements that bring new revenue, said CFO Wayne Payce: “Where there are upgrades needed, we will start spending some capital, so you will start seeing cap-ex going up compared to prior years.”
Chmn. Richard Parsons also deflected questions about the firm’s plans to include any of its 84% stake in Time Warner Cable in a possible IPO arising from the Adelphia merger. If Adelphia doesn’t distribute its 16% ownership interest in Time Warner Cable to creditors, it must sell at least 1/3 of it in a public offering. “Do we intend to add [to the public offering] some of the remaining 84% the company that we own?” Parsons said. “We haven’t made any judgements whether we would add anything to it.”
Executives didn’t tout the Adelphia deal because approval from some creditors is pending in its bankruptcy case and Time Warner doesn’t want to violate securities rules by touting the cable unit before a spinoff, said 2 shareholders. “Their part of the deal has closed, but the restructuring plan has not been approved,” Gabelli money manager Chris Marangi said: “There is still some unfinished business.” Gabelli affiliates manage about $26 billion in stock, including Time Warner.
AOL was the focus of officials’ remarks on the conference call due to its shift to free website from subscription-based service, said Front Barnett Assoc. Chmn. Marshall Front. Many questions remain about how acquiring Adelphia systems will impact Time Warner Cable financial results, Front, whose firm owns $30 million of the parent company’s stock, said: “I think we're going to be hearing a lot more about Adelphia… The questions I have are how long is it going to take to digest this business and what kind of margins will you have when you digest these businesses.”
Time Warner had a better-than-expected Q2, driving shares up about 3%. Total revenue grew to $10.7 billion from $10.6 billion a year ago. The firm reported $1.8 billion profit, compared to last year’s $1.3 billion loss, traceable to $3 billion in securities litigation expenses. The cable unit’s VoIP rollout continued to drive revenue and subscriber growth and is helping sales of other cable products, Parsons said: “The opportunity to go back to all the homes passed with a new product offering, gives us the opportunity to sell in other cable products to folks who weren’t taking it before.”
Time Warner Cable added 234,000 new VoIP customers in Q2, exceeding Prudential analyst Katherine Styponias’ estimate of 190,000, but falling short of Bank of America analyst Douglas Shapiro’s 265,000 forecast. In the firm’s most established VoIP markets, it’s near 20% VoIP penetration among its subscribers, Bewkes said: “With new additions like adding second lines and in state calling, we think we can continue to stay ahead,” of cable industry peers. VoIP seems to be enhancing basic subscriber numbers. In Q2, the company added 18,000 basic cable subscribers. Most analysts expected the firm to report a net loss of basic subscribers, because cable operators frequently lose college- age subscribers and winter vacationers during Q2.
Time Warner’s VoIP success is a good sign for Comcast, which lags a year behind Time Warner in deploying VoIP, Wachovia analyst Jeff Wlodarczak said in a research note. “Time Warner Cable… and Cablevision are providing plenty of evidence that Comcast’s recent launch of triple play/phone should accelerate results ahead of the market’s expectation,” he said.
Ad revenue at AOL grew 40% to $449 million -- offset by a 11% dip in subscription revenue to $1.5 billion. The unit had total revenue of $2 billion, down 2% from last year but better than analysts expected. “AOL’s advertising results this quarter only serve to bolster our confidence [in the company’s new strategy],” Parsons said. Time Warner cable network revenue grew 9% to $2.7 billion. Despite overall weak pre-booked cable ad sales, the firm’s Turner networks will beat their peers, Bewkes said: “We're looking forward to making that announcement and we do think our revenue in ads are going to be quite strong.”
Bewkes wouldn’t discuss Time Warner’s involvement in the AWS Auction beyond pointing to the cable unit’s deal with Sprint/Nextel. “That gives us a quadruple play to compete more effectively and it serves as a 3rd screen beyond the TV and PC,” he said.