Time Warner Boosted By Record Foriegn Box-Office Opening For The New Hobbit Movie

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Time Warner

Time Warner‘s (NYSE:TWX) studio, Warner Bros., recently released the final sequel in Hobbit series in international markets. The movie topped the past weekend in several markets including, Germany and the U.K. Warner Bros. currently commands 14% market share in the U.S. for 2014 with grossing of over $1.36 billion so far. If we include international box-office, total gross is close to $3 billion. [1] The movie business benefited from the success of The Lego Movie, Godzilla, Edge of Tomorrow and 300: Rise of An Empire. Looking at the first three quarters, studio’s revenues stood at $8.27 billion, up 4% over the prior year period. The studio revenues include box-office revenues, home entertainment and studio’s TV production and distribution revenues. The segment operating income was $840 million during the first three quarters of 2014 as compared to $751 million in the prior year period. [2]

We wonder if Warner Bros. can continue to ride high over the success of its movies in the coming months. The performance of a studio can be erratic as it largely depends on the audience and box office response, which can be fickle and hard to anticipate.

See our complete analysis for Time Warner

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Success of Hobbit In International Markets

The Hobbit: The Battle of the Five Armies has seen a spectacular opening at the foreign box office. The movie has already grossed over $122 million at the international box-office in the first few days of opening. It must be noted that the movie hasn’t opened in the U.S. yet. The movie scored the biggest Warner Bros. opening weekend of all time in Russia and scored the biggest opening day of the year in New Zealand. Also, it scored the biggest opening weekend of the year in Germany and France, as well as the biggest December opening ever in Mexico. [3]

Time Warner’s Studio Business

Warner Bros. includes production, acquisition, marketing and distribution of movies and stage plays worldwide. This includes revenue from different media such as box office, home entertainment (example DVDs), television and other media. The studio offers a wide range of movies and owns some of the biggest movie franchises including Batman, Harry Potter and The Lord of The Rings. The studio also operates a television group, which produces regular TV shows along with animated series as well as reality-based programs. It licenses this developed content to TV networks and video-on-demand services. For 2014-15 season, Warner Bros. Television Group expects to produce 60 series including 2 Broke Girls, The Big Bang Theory, The Bachelor, The Following, Gotham, The Mentalist, The Middle, Two and a Half Men, The Vampire Diaries and The Voice.

The studio business contributes more than 15% to Time Warner’s value, according to our estimates. In the first nine months of 2014, it accounted for 43% of overall revenues and 30% to the company’s operating income. Historically the contribution in earnings has been low due to high marketing costs associated with the studio business.

The Year So Far

Godzilla, The Lego Movie, Edge of Tomorrow and 300: Rise of An Empire drove Warner Bros.’ success at the box-office this year. These four movies have grossed close to $1.70 billion at the global box office while the production budget of these movies combined was a little over $500 million. The studio also benefited from its other releases including Annabelle and Into The Storm. For instance, Annabelle was made with a production budget of just $6.5 million and the movie has so far grossed over $250 million at the worldwide box-office. [4] The success of these movies at box-office will also aid other studio revenues such as the revenues earned by the studio via pay-per-view, video-on-demand and pay-TV mediums.

Warner Bros. will reap the benefits from the success of The Hobbit: The Battle of the Five Armies in Q4 2014 as well as Q1 2015. We estimate the studio’s box-office revenues to be around $2.38 billion and an estimated EBITDA margin of 16% for Warner Bros.’ movie business will translate into EBITDA of close to $380 million in 2015, representing close to 4% of the company’s overall EBITDA for the year. However, we estimate the entire studio EBITDA to be north of $2 billion, representing 25% of the company’s overall EBITDA during the same period.

For 2014, we estimate Time Warner’s overall revenues of $29.46 billion and EPS of $4.19, which is in line with the market consensus of $3.99-$4.40, compiled by Thomson Reuters. We maintain a $83 price estimate for Time Warner’s shares, which is close to the current market price of $81.

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Notes:
  1. 2014 Worldwide Grosses, Box Office Mojo []
  2. Time Warner’s SEC Filings []
  3. ‘Hobbit’ Finale Huge with $117 Million in Overseas Box-Office Debut, The Wrap, Dec 14, 2014 []
  4. Annabelle, Box Office Mojo []