Time Warner’s Q4 Earnings Likely Boosted By Subscription Growth At Turner And HBO

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Time Warner

Time Warner (NYSE:TWX) will report its Q4 2014 earnings on February 11th. The ratings at Turner networks remained softer in 2014 with TBS down 14% while TNT was down 12% in 18-49 demographic. [1] Softer ratings can put some pressure on the advertising income for the company. However, subscription revenues at Turner networks have been on an uptrend in the recent past and we expect it to continue to grow, as the network will pass on some of the programming cost increases to the distributors. HBO has seen solid growth in the recent past but here also higher programming costs remains a concern. In the previous quarter, HBO revenues were up 10% but operating income declined 24% amid higher programming costs. [2] Looking at Warner Bros., the studio surely benefited from the wide success of Hobbit: The Battle of Five Armies. However, it will have a tough comparison with the prior year period, which saw the success of The Hobbit: The Desolation of Smaug as well as Gravity.

We currently estimate revenues of around $29.20 billion for Time Warner in 2015, with EPS of $4.56, which is in line with the market consensus of $4.26-$5.08, compiled by Thomson Reuters. We currently have a $80 price estimate for Time Warner, which we will update after the fourth quarter earnings announcement.

See our complete analysis for Time Warner

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Turner Networks Likely To See Continued Subscription Revenue Growth

Turner networks struggled with their ratings in 2014 as viewership declined across the networks. Looking at 2014 viewership, TNT and TBS were down 4% and 10% respectively. [1] In the previous quarter, the company took a $343 million programming charge and has been making continuous efforts to revamp its programming. Some of its programming saw a ratings growth towards the end of the year with shows such as Ground Floor which is reaching an average of 3.2 million viewers per episode in its second season. [3] The benefits of this ratings growth will be visible during the March quarter earnings. Looking at subscription revenues, they have been on an uptrend and grew 8% to $3.97 billion in the first nine months of 2014. [2] This can be attributed to higher rates as well as higher contribution from international markets. These factors likely drove subscription revenue growth in the fourth quarter as well and  it will be interesting to see how the advertising income pans out given these trends in ratings and viewership.

A Tough Comparison For Warner Bros Amid The Success Of Hobbit And Gravity In The Prior Year Quarter

Warner Bros. raked $400 million at the U.S. box office during the December quarter primarily led by the Hobbit movie. Hobbit: The Battle of Five Armies has been very successful for Warner Bros. and is currently a little short of $1 billion in global box-office grossing. However, this was the only big success for the studio while the prior year quarter grossing was over $500 million in the U.S. led by Gravity as well as The Hobbit: The Desolation of Smaug. Lower theatrical revenues could further put pressure over the company’s quarterly earnings. However, the studio is seeing solid start to 2015 with the wide success of American Sniper, benefits of which will be visible in the March quarter earnings. We currently estimate the studio’s theatrical revenues to be around $2.40 billion and an estimated EBITDA margins of 16% will translate into EBITDA of over $375 million, representing a mere 4% of the company wide EBITDA for 2015. However, the contribution will be much higher at around 25% if we account for the movie and TV show production, licensing and electronic sales of the company.

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Notes:
  1. ESPN no. 1 in cable ratings for 2014, Boston Herald, Jan 3, 2015 [] []
  2. Time Warner’s SEC Filings [] []
  3. TBS & Adult Swim Start 2015 With a Ratings Bang, Broadway World, Jan 9, 2015 []