Time Warner (NYSE:TWX) will report its Q1 2013 earnings on May 1. We expect the company’s cable networks, especially TBS and TNT that reach more than 100 million subscribers, to drive the quarterly growth. In addition to this, HBO will play a critical role due to continued subscriber growth in international markets and increase in monthly subscription fee.
In the last quarter, Time Warner faced some pressure on its revenue growth due to weak CNN ratings and a decline in publishing revenues. However, its other cable networks are performing fundamentally well. That’s good news given that cable networks constitute more than 75% of Time Warner’s value.
Cable Networks Driving Growth
We believe that the expansion of HBO will be a key driver for Time Warner’s future growth. We estimate that HBO U.S. contributes roughly 20% to the company’s value. While the subscriber base is limited, the network charges a high fee per subscriber of close to $8 (2013 forecast). At the same time, HBO’s ability to increase its subscriber fee will reduce as the competition from other premium networks as well as online video service providers such as Netflix (NASDAQ:NFLX) intensifies.
However, international markets present a good opportunity for HBO that already has close to 114 million subscribers globally as compared to 36 million for Netflix.  We believe that original programming would help HBO to keep up its demand and expand further in international markets. Programs such as True Blood and Game of Thrones have been successful and recorded high viewership for the recent seasons. 
The Cartoon Network has also seen improvement in its ratings. For the month of March, it was the top ranked channel in its core demographic. 
In the first quarter of 2013, TBS was ranked as basic cable’s top network in primetime delivery of adults 18-34 and 18-49. The original comedy series Cougar Town attracted 2.3 million viewers. The Big Bang Theory was ranked at the top for basic cable’s off-net series for the quarter. 
While healthy ratings for Cartoon Network and TBS will help, a weak performance from CNN will slightly offset the growth. CNN’s viewership and ratings continue to fall due to the relative lack of opinion-based programming while its peers Fox News and MSNBC are performing better. Time Warner has been expanding its digital presence on multiple platforms, which will help it keep up with the trend in the market, where consumers are increasingly streaming videos and movies on multiple devices.
Subdued Performance In Movie and Magazine Business
While Time Warner’s cable networks business is flourishing, we expect its movie and magazine divisions to report subdued performance. Earlier this year, Time Inc., the largest magazine publisher in the U.S., revealed that it was in talks to sell many of its titles. The industry in general is under intense financial pressure and the company’s publishing unit has consistently underperformed. During the last quarter, its revenues fell 7% to $967 million.  While we expect the magazine business’ revenues to decline during this quarter, the impact on Time Warner will be low, as this business contributes only 4% to the company’s value. Time Warner’s movie arm ‘Warner Brothers’ has entered into several content distribution deals, which will strengthen its multichannel subscription model by adding more platforms to deliver its content. However, it has released five films in a row that have underperformed at the box office this year. 
Our current price estimate for Time Warner stands at $62, implying a premium of about 5% to the market price.Notes:
- Netflix tops HBO in subscribers, Silicon Valley Business Journal, Arp 27, 2013 [↩]
- ‘Game of Thrones’ season 3 premiere ratings break records, Entertainment Weekly, Apr 1, 2013 [↩] [↩] [↩]
- Quarterly Ratings Notes for Adult Swim, Cartoon Network, TBS, TNT & TruTV: NCAA Basketball, ‘Cougar Town’, ‘Southland’, ‘Dallas’ & More, TV by the numbers, Apr 2, 2013 [↩]
- Time Warner’s SEC Filings [↩]
- Warner Bros. slayed over five box office flops, Brisbane Times, March 22, 2013 [↩]