Time Warner Earnings Jump 29% Over Strong Growth At HBO

Time Warner (NYSE:TWX) recently reported its Q2 2014 earnings. Revenues increased by 3% to $6.79 billion and adjusted operating income and earnings grew by 17% and 29% respectively. ^[1]

The growth was primarily driven by HBO, which has seen 15% subscriber growth in international markets over the past 12 months. ^[2] HBO has benefited from its original programming including Game of Thrones, which averaged 19 million cumulative viewers, making it the most watched original series in the history of the network. However, lower ratings at Turner networks weighed on advertising revenues.

Time Warner’s film division, Warner Bros., benefited from the success of Godzilla. However, growth against the prior year period was offset by the impact of Man of Steel, The Great Gatsby and Hangover III, which performed well at the box-office last year. Accordingly, the studio saw 2% decline in revenues in the June quarter. However, operating income grew by 29% to $234 million due to lower costs. ^[1]

Despite good set of numbers, the stock plunged over 12% in yesterday’s trade as Twenty First Century Fox (NASDAQ:FOX) decided to withdraw its bid for Time Warner. Fox had earlier made a bid to acquire the rival media house in a deal worth $80 billion. However, Time Warner had rejected the offer stating to be better off on its own.

We currently have $79 price estimate for Time Warner, which we will soon update based on the second quarter earnings announcement.

See our complete analysis for Time Warner

HBO Continues to Ride High Over Subscription Growth

HBO revenues for the June quarter increased 17% to $1.42 billion on 56% growth in content revenue led by licensing of some of its shows to Amazon. Subscription revenues also increased 10% to $1.14 billion. Segment operating income rose 19% to $548 million. ^[1] These results amount to a good set of numbers for the network. It must be noted that HBO is of immense value for Time Warner as it contributes close to 30% to the company’s value, according to our estimates.

The network charges a high monthly subscription fee in the U.S. This figure has increased from about $5.44 in 2008 to an estimated $6.77 per subscriber per month in 2013. Sustained demand for programming and multi-year contracts with pay-TV service providers 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. We expect HBO to continue to grow strongly in the coming years due to the demand for its original programming including True Detective and Game of Thrones. This will drive the subscription growth in both domestic and international markets. Accordingly, we estimate the monthly subscription fees in the U.S. to be north of $8 by end of the decade.

Lower Ratings Weigh Over Turner Networks Advertising Revenue

We estimate that the Turner Networks contribute around 50% to Time Warner’s stock value. Turner networks include TNT, TBS, CNN, truTV, Cartoon Network and Adult Swim. Revenues at Turner increased by 5% to $2.75 billion in Q2 2014, driven by 8% growth in subscription revenues. However, advertising revenues were flat at $1.28 billion amid lower ratings at its networks. TNT saw 26% drop in year-to-date ratings in 18-49 demographic in primetime. ^[3] The network has come up with new programming such as The Last Ship and Murder In The First, which are doing well and are also the 2 most watched new series on ad-supported cable this year so far. However, the company stated that ratings will continue to be drag on performance in the near term leading to flat or low single-digits decline in advertising for the third quarter. ^[2]

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1. Time Warner’s SEC Filings [↩] [↩] [↩]
2. Time Warner’s (TWX) CEO Jeffrey Bewkes on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, Aug 6, 2014 [↩] [↩]
3. Turner CEO plots turnaround as TNT shrinks, New York Post, July 22, 2014 [↩]