Even With Ratings Pressure, There Is An Upside Potential To Time Warner If This Event Is Triggered
Time Warner’s (NYSE:TWX) Turner networks ratings have been under pressure in the recent past due to the rise of alternative video platforms, which are taking a notable chunk of the video entertainment market. There are fewer viewers for traditional television than in even recent years and Time Warner, along with other media companies, has felt the effect. But does that mean there is no way out? We don’t think so as the company’s TV shows production and licensing business has grown steadily and is expected to continue this trajectory. In fact, as more avenues of streaming come into the market, Time Warner may be able to generate more revenues in the form of content licensing fees and add incremental revenues of $3 billion over our current forecast. This could trigger a 10% upside to the stock, in our opinion.
See our complete analysis for Time Warner
A Snapshot of Time Warner’s TV Production And Licensing Business
Time Warner’s Warner Bros. Television Group 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, the studio produced several TV series, including 2 Broke Girls, The Big Bang Theory, The Following, Gotham, The Mentalist, Two and a Half Men, The Vampire Diaries and The Voice. The studio has tied up with DC Entertainment and will bring a new series, Legends of Tomorrow, along with much anticipated Supergirls in the upcoming television season.
Given the popularity of these shows on television, especially in the desired 18-49 demographics, Time Warner has been aggressive in leveraging them outside the traditional television and has struck several video-on-demand deals with streaming providers such as Amazon Prime and Netflix. In April 2015, the company inked a fresh deal with Hulu for video rights to past and some of the future seasons of shows on Cartoon Network, Adult Swim, TNT and TBS, for an undisclosed amount. [1]
More Licensing Avenues Can Catalyze The Segment Growth, Leading To A 10% Upside
Looking at the segment revenues, they have grown at an average annual rate of 9% in the last 6 years, from $3.15 billion in 2009 to over $5.0 billion in 2014. [2] A shift in audience from traditional television to digital platforms does result in lower ratings on traditional television, but with more avenues to stream the content, media companies have been able to grow the content licensing fees. We maintain our view that there is a place for both streaming and traditional television to co-exist in future and accordingly, we expect this uptrend to continue in the coming years.
We estimate the revenues to be north of $8 billion by the end of our forecast period. An estimated EBITDA margin of over 21% will translate into EBITDA of $1.85 billion, representing around 15% of the company-wide EBITDA. However, higher than expected growth in licensing led by more streaming avenues could lead to an explosive growth in the segment revenues and translate into a 10% upside to our price estimate for Time Warner. Here, we estimate the segment revenues to be north of $11 billion by 2021. Profit growth will not only come from higher revenues but also from higher EBITDA margins.
With continued growth in demand for alternative video platforms, the content owners can earn more licensing revenues. Nielsen will soon start measuring ratings on Netflix and this can help the content owners in negotiating the right price for their programming. Also, with more streaming options such as Apple’s (NASDAQ:AAPL) proposed streaming service and Sony’s Web TV, which is a new entrant into this space, licensing and distribution revenues can see significant growth in the coming years. Turner’s entire portfolio of networks is available on Sony’s Vue service. [3] The trend in the industry highlights that there will more streaming players in future and this is one avenue which the media companies can look upon to offset the declines seen on the traditional television front.
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- Hulu Pacts With Turner for Exclusive Rights to Cartoon, Adult Swim, TNT, TBS Shows, Variety, Apr 23, 2015 [↩]
- Time Warner’s SEC Filings [↩]
- Turner Broadcasting Partners with Sony for Playstation Vue, Time Warner’s Press Release, Mar 18, 2015 [↩]