Time Warner (NYSE:TWX) recently reported its Q3 2013 earnings, which fared reasonably well given that it had to compare with last year’s benefit from success of The Dark Knight Rises. While the overall revenues remained flat at $6.86 billion, net income surged 44% to $1.18 billion and adjusted earnings per share jumped 20% to $1.01. On the cost front, the company managed to reduce its cost across all the divisions resulting in overall drop of 5% in cost of revenues. 
The company reported solid growth in Networks segment but that was offset by declines at the Film and TV Entertainment and Publishing divisions. While Film and TV Entertainment had a tough comparison from last year, the Publishing segment continues to experience declines in its print advertising and newsstand sales as a result of market conditions in the magazine publishing industry. The company has decided to spin off its publishing division, Time Inc. into a separate company by the second quarter next year.  In September 2013, HBO fully purchased its partner’s interests in HBO Asia and HBO South Asia for $37 million in cash, net of cash acquired. HBO Asia operates HBO and Cinemax-branded premium pay and basic tier television services serving over 15 countries in Asia.
Going forward, the company expects a weaker Q4 due to continued pressure at the Publishing division and higher expected equity losses related to CME media. CME’s management recently warned that it would be unable to operate in the next 12 months unless additional funding was secured.  Time Warner is CME’s largest shareholder with a 49.99% stake and is in discussions about a capital transaction including a potential loan to CME. 
In the long run, we continue to believe that Time Warner will see healthy growth driven by its cable networks. HBO continues to expand internationally with double-digit growth. TNT and TBS in the U.S. are seeing improved ratings. TBS ranked #2 among cable networks in prime across adults 18 to 34 and 18 to 49 in the quarter while TNT was the #2 network on cable among adults 25 to 54 in total day. CNN’s new team is investing in day parts and the network has also come to be ranked #2 in news channels, ahead of MSNBC.  A strong movie lineup of Warner Bros. will aid the overall revenue growth.
We currently have $67 price estimate for Time Warner, which we will soon update based on the third quarter earnings announcement.
Cable Networks Continue To Lead The Growth
According to our estimates, cable networks contribute more than 75% to Time Warner’s value. The revenues at its cable networks division increased by 5% to $3.52 billion in Q3 2013 driven by 11% jump in advertising. Subscription revenues also grew 4% driven by higher domestic rates and subscriber growth in international markets. 
TNT network has been riding high on the success of Rizzoli & Isles, Major Crimes, Falling Skies and Perception. The coverage of NBA Playoffs and NASCAR along with the success of original series has boosted the network’s ratings. Similarly, CNN also witnessed better ratings during the quarter driven by the success of Anderson Cooper and Piers Morgan Live. Unlike Fox and MSNBC, which were down 11% and 27% respectively, CNN’s numbers were actually up over Q3 2012, with 9% gain in total viewers over last year.  HBO remains at the top among premium pay channels, with its original series earning 27 Primetime Emmy Awards this year. That was the most of any network for the twelfth consecutive year. However, the network is facing fierce competition from Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN). Netflix has already crossed HBO in terms of subscribers in the U.S. (See – Netflix Demonstrates Strong Performance; Stock Remains Richly Valued) This will limit HBO’s ability to increase the subscription pricing in the near term.
The revenues of Warner Bros. studios declined 7% to $2.69 billion due to its comparison with The Dark Knight Rises. The quarter was muted as only three movies were able to gross over $250 million. However, the movie lineup is strong in the near term including The Hobbit: The Desolation of Smaug and 300: Rise of An Empire.Notes:
- Time Warner’s SEC Filings [↩] [↩]
- Time Warner Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, Nov 6, 2013 [↩] [↩] [↩]
- Central European Media Enterprises Ltd. Reports Third Quarter And Nine Months Ended September 30, 2013 Results, CME Press Release, Oct 30, 2013 [↩]
- Q3 2013 Cable News Ratings: Fox #1 Overall, MSNBC #2 in Primetime, CNN #2 in Total Day, Media ITE, Oct 2, 2013 [↩]