Time Warner (NYSE:TWX) recently reported its Q1 2013 earnings, and the sluggishness in the film and publishing divisions impacted the company’s overall performance. However, the cable networks business, which includes HBO, CNN, TNT and TBS, saw revenue growth of 3%. While the advertising revenue declined, subscription fee continued to drive overall revenue gain. HBO’s Game of Thrones is poised to become the most watched series on the premium cable network and CNN also showed ratings improvement after its coverage of recent tragic events in Boston and Texas. Going forward, we expect the company to perform better as the cable networks ratings continue to improve.
Cable Networks Improve
Led by the popularity of Game of Thrones, HBO continues to set viewership records. The lineup looks strong for the network as the second season of The Veep has just kicked in. Another popular series True Blood will feature in June, Newsroom in July and The Broadwalk Empire later this year. Further, the company’s management confirmed that HBO won’t be available on a standalone basis to consumers via broadband without having to subscribe to a larger cable or satellite TV package in the U.S.  However, the company provides such service in Scandinavia. 
Cable networks such as CNN, TNT and TBS are also doing well. TNT has seen an improvement in ratings for its programming such as Dallas and Boston’s Finest. The network plans to introduce original shows including Rizzoli & Isles, Major Crimes, Falling Skies and Perception later in June. TBS was ranked as top ad-supported cable network in prime time across adults 18 to 34 and 18 to 49, driven by the continued strength in The Big Bang Theory, Cougar Town and King of the Nerds.  Overall cable networks revenues for Time Warner grew by 3%, amounting to $3,695 million. While subscription revenues increased by 4%, advertising revenues saw a decline of 1% during the quarter. 
Going forward we expect the growth in cable networks revenues to continue as the company is focused on original programming and developing new content. In the light of success of Game of Thrones we expect HBO to expand its subscriber base. However, HBO’s ability to increase its subscriber fee will reduce due to the increased competition from other premium networks as well as online video service providers such as Netflix.
Dismal Performance Of Publishing & Movie Businesses
Earlier in March, Time Warner announced plans to spin-off its worst performing publishing division after unsuccessful talks to merge the unit with Meredith Corp.  Meanwhile, the division continues to underperform for the company. For the first quarter, the publishing segment recorded revenues of $737 million and $9 million in operating losses.  As a result of market conditions in the magazine publishing industry as well as the current economic environment, revenues from subscriptions and content declined 11% and 10% respectively. 
Time Warner’s film division ‘Warner Brothers’ has released five films, including Gangster Squad and Jack the Giant Slayer that have underperformed at the box office this year and revenues for the film and entertainment division declined by 4%. However, the unit ended up with a strong TV season among adults 18 to 49, with 4 of the top 6 comedies on the air: The Big Bang Theory, Two and a Half Men, Two Broke Girls and Mike & Molly.  Going forward, there is an interesting line-up of movies such as The Great Gatsby, The Hangover Part 3, Man of Steel, Pacific Rim and The Hobbit Part 2 which can boost the division’s performance.
We are currently in the process of updating our model for Time Warner in the light of recent earnings.
Our current price estimate for Time Warner stands at $62, implying a premium of about 5% to the market price.Notes:
- Time Warner Management Discusses Q1 2013 Results – Earnings Call Transcript, Seeking Alpha, May 1, 2013 [↩] [↩] [↩]
- HBO GO Without Cable? Not Yet, Says Time Warner Chief, Deadline, May 1, 2013 [↩] [↩] [↩]
- Time Warner SEC filings [↩]
- Time Warner Will Spin Off Time Inc. After Meredith Talks End, Time, Mar 6, 2013 [↩]