Time Warner Q2 2015 Earnings Preview: Turner Networks And HBO Likely To Drive Earnings Growth

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Time Warner

Time Warner (NYSE:TWX) will report its Q2 2015 earnings on August 5th. [1] CNN posted double-digit ratings growth in the second quarter while TBS and TNT continued to be the most watched network in key demographic groups. Turner networks was able to sell most of their upfront inventory with higher ad rates for the 2015-16 television season. These factors likely provided a lift to Time Warner’s Q2 earnings. Furthermore, HBO will see an uptick in revenues from its standalone streaming service, HBO Now. We are eager to learn the subscriber trends for this new over-the-top streaming service. We currently estimate there will be around 5 million HBO Now subscribers by the end of the decade. Looking at Warner Bros., the studio surely benefited from the success of Mad Max: Fury Road and San Andreas. However, currency headwinds may weigh on the segment’s bottom line. We currently estimate revenues of about $29 billion for Time Warner in 2015 with EPS of $4.58, which is somewhat lower than the market consensus of $4.67, compiled by Thomson Reuters. We currently have a $95 price estimate for Time Warner, which we will update after the second quarter earnings announcement.

See our complete analysis for Time Warner

Ratings Growth At CNN And Higher Ad Rates Likely Lifted Earnings

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CNN saw solid ratings growth in Q2 with a 20% jump in primetime viewership and 26% jump in total day viewers. [2] TNT also saw higher ratings for its programming, including Rizzoli & Isles, Major Crimes and The Last Ship. The benefits of these ratings growth surely boosted the company’s advertising income in the June quarter. Looking at upfront sales, Turner has sold most of its inventory with only a 5% drop in overall volume, compared to a 9% decline for its C3 ratings. [3] We currently estimate overall advertising revenues of around $4.72 billion for Time Warner in 2015 and an estimated EBITDA margin of 36% for cable networks will translate into EBITDA of $1.70 billion, representing more than 20% of the company-wide EBITDA.

Time Warner’s premium cable network HBO should also see higher revenues with continued subscriber growth. The network saw record ratings for fifth season of Game of Thrones in the second quarter. [4] While there is no advertising associated with HBO, the network likely saw a subscriber growth given the massive demand for its programming. It must be noted that HBO is one of the most expensive networks and charges a monthly fees of more than $7 per subscriber, according to our estimates. Given the popularity of its programming, HBO has been able to raise the prices consistently in the past and we expect it to continue this trajectory. Recently, the network’s president, Michael Lombardo, stated that it may take 3 more seasons to complete Game of Thrones and the network may also make a prequel to the hit series. [5]

Currency Headwinds Likely To Weigh Over Time Warner’s Studio Operations

Warner Bros. raked $437 million at the U.S. box office during the June quarter primarily led by the success of Mad Max: Fury Road and San Andreas. However, none of the Warner movies was able to gross above the $500 million mark at the global box-office. The studio had a bigger hit, Godzilla, in the prior year quarter. Given these circumstances, we expect at best stable to minor uptick in the segment revenues. Looking at the bottom line, it should see some pressure amid currency headwinds. The dollar remained strong in the June quarter and this likely weighed on the foreign box-office grossing. We currently estimate the studio’s theatrical revenues to be around $1.90 billion and an estimated EBITDA margins of 16% will translate into EBITDA of over $315 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 Warner Bros. studio. Looking forward, the studio has a solid slate with popular cast for second half of 2015. However, it does not have a big DC title until Q1 2016, when it will release much hyped Batman vs. Superman: Dawn of Justice.

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Notes:
  1. Time Warner’s Press Release []
  2. 2015 Q2 Ratings Report: ABC, Fox News on top; MSNBC struggles as CNN makes gains, Politico, June 30, 2015 []
  3. Turner Nears Upfront Finish Line, Advertising Age, July 1, 2015 []
  4. ‘Game of Thrones’ Finale Sets Ratings Record, Variety, June 16, 2015 []
  5. ‘Game of Thrones’ Eyes 8 Seasons, HBO ‘Open’ to Prequel Series, Variety, July 30, 2015 []