Time Warner (NYSE:TWX) recently reported its Q4 2013 earnings. While the revenues increased by 5% to $8.57 billion, the operating income declined 9% to $1.84 billion as a result of a 12% increase in programming expenses.  The company’s premium network Home Box Office (HBO) and Cinemax added 2 million subscribers in the year. Warner Bros. in December quarter benefited from the success of movies Gravity and The Hobbit: The Desolation of Smaug. The publishing division remained muted in the quarter. While there was a positive impact due to the inclusion of American Express Publishing Corporation, there was a negative impact from the shift of an issue of both People and Sports Illustrated into the third quarter. The company has decided to spin-off its publishing division, Time Inc., into a separate company by the second quarter of 2014. ((Time Warner Management Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, Feb 5, 2014))
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 driven by the company’s focus on content. TBS finished 2013 as the No. 1 cable network in prime time in adults 18 to 49 for the first time in over a decade while TNT was the No. 2 network on cable among adults 25 to 54 in total day.  CNN’s new team is focused on revamping the primetime schedule and the network ranked No. 2 in news channels, ahead of MSNBC, in total day. A strong movie line-up of Warner Bros. will aid the overall revenue growth.
We currently have $74 price estimate for Time Warner, which we will soon update based on the fourth quarter earnings announcement.
Continued Subscription Growth At HBO
HBO is a premium pay-TV service owned by Time Warner, and primarily offers recently released movies and original TV programming. HBO’s U.S. operations account for more than 22% of Time Warner’s value, according to our estimates. HBO revenues for the December quarter increased 6% to $1.3 billion due to 8% growth in subscription revenue reflecting higher domestic rates and consolidation of HBO Nordic and HBO Asia. However, content revenues declined by 9% due to lower home video revenues. Operating income declined 4% to $413 million, primarily due to a 12% increase in programming costs. 
HBO charges a high monthly subscription fee in the U.S. This figure has increased from about $6 per subscriber per month in 2008 to an estimated $7.60 per subscriber per month in 2012. Sustained demand for programming, multi-year contracts with pay-TV service providers and rising programming costs are some of the reasons driving growth in HBO’s subscription fee. We expect the same factors to continue to drive growth in the future.
Turner Operating Income Declines Over Higher Programming Costs
The Turner segment includes the company’s cable networks such as TBS, TNT, CNN and Adult Swim. At Turner, revenues increased 3% to $2.5 billion led by 6% growth in subscription revenues and 1% growth in advertising revenues.  Growth in the subscription revenue was a result of higher domestic rates and international growth, while the advertising revenues benefited from increased pricing and demand for domestic networks. Higher programming costs dragged the operating income down by 10% to $853 million.  The programming expenses increased due to higher programming impairments and increased investments in original programming.
Going forward, the company will benefit from Turner’s domestic affiliate renewal cycle in the first quarter of 2014. However, the company expects an increase in programming expense growth, primarily due to the airing of the NCAA Final Four and increased investments in original programming. 
Warner Bros. Benefits From Theatrical Success
Warner Bros. delivered a strong year at the box-office and over the television. The studio has over 60 programs airing on broadcast and cable during the 2013-2014 television season, including the hits such as The Big Bang Theory, The Voice and The Following. Warner Bros. contribute more than 6% to Time Warner’s value, according to our estimates. For the December quarter, revenues increased 7% to $4 billion and operating income grew 4% to $573 million over the success of Gravity and The Hobbit: The Desolation of Smaug.  Gravity was made with a production budget of $100 million and it has grossed close to $700 million at the box-office globally. 
Warner Bros. had an impressive run at the box-office and ended 2013 with highest market share (17%) in the U.S., with grossing of over $1.87 billion.  It will be interesting to see how 2014 pans out for the studio. It is set to release close to 20 titles during the year including 300: Rise of An Empire, The Hobbit: There and Back Again and Godzilla, which is one of the most awaited movies in 2014.Notes: