Lower Ratings At Turner Networks Will Weigh Over Time Warner’s Q2 Earnings

Time Warner (NYSE:TWX) will report its Q2 2014 earnings on August 6. This will be the first earnings for the company after completing the spin-off of its publishing business last month. Accordingly, a direct comparison with the prior year period will be difficult.

Turner networks have seen 10% drop in ratings for the quarter and this likely weighed over its Q2 earnings. While its movie business will benefit from Godzilla, it will compare with Hangover III and The Great Gatsby, both of which performed well at the box-office in the prior year same quarter. We expect HBO to see continued growth driven by its original programming including Game of Thrones. In sum, we believe it will be a quiet quarter for Time Warner with flat comparable revenues and earnings.

Last month, Time Warner’s stock jumped over 15% after 21st Century Fox’s (NASDAQ:FOX) offer to acquire the company in a $80 billion deal. Time Warner rejected the offer stating to be better off on its own. We’ll be closely watching for any update on this front and the roadmap for future growth from the company’s management.

See our complete analysis for Time Warner

Lower Ratings at Turner Networks LikelyWeighed On Earnings

We estimate that Turner Networks contribute close to 50% to Time Warner’s stock price. Turner Networks include TNT, TBS, truTV, CNN and Cartoon Network. The networks have been struggling with their ratings this year as viewership has declined across the board. Average year-to-date ratings for TNT were down sharply in its target demo averaging 564,000 viewers in the 18-49 demographic in primetime through the week ended July 20. This is 26% lower from 764,000 viewers in the prior year period. ^[1]

In the previous quarter, the company’s management stated that TNT has lost ground with younger viewers as they didn’t take enough creative risk with its programming during the past few years. ^[2] The network is now addressing this issue by bringing in new programming. In June, the network came up with two new series – Murder at the First and The Last Ship – both of which were well received and scored high ratings. The Last Ship attracted 5.3 million viewers for the June 22 episode and is currently averaging 4.51 million viewers for the season. ^[3] Last month, the network renewed the series for second season. We are eager to see if Turner Networks can turnaround ratings this summer with its new programming. For the June quarter, though, lower ratings were likely still an issue.

Warner Bros. will See Lower Theatrical Revenues

Time Warner currently ranks second with market share of 16.1% at the U.S. box-office. ^[4] In the previous quarter, Warner Bros. revenues jumped 14% to $3.07 billion and operating income surged 40% to $369 million, reflecting benefits from the success of The Lego Movie. ((Time Warner’s SEC Filings))

We expect to learn the studio benefited from the success of Godzilla, which was made with a production budget of $160 million and has grossed more than $500 million at the box-office globally. ^[5] However, it compares to prior year benefits of Man of Steel, The Great Gatsby and Hangover III, which performed well at the box-office and boosted the company’s bottom line. Accordingly, we suspect that the growth for this quarter was short of the 32% jump in the prior year period.

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1. Turner CEO plots turnaround as TNT shrinks, New York Post, July 22, 2014 [↩]
2. Time Warner’s CEO Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, April 30, 2014 [↩]
3. The Last Ship: Season One Ratings, TV Series Finale, July 29, 2014 [↩]
4. Box Office By Studio, Box Office Mojo, As of August 5, 2014 [↩]
5. Godzilla, Box Office Mojo, As of August 3, 2014 [↩]