For Time Warner’s Consumer Products Business, Lego Dimensions And Other Video Games And Licensing Will Fuel Growth

TWX: Time Warner logo
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Time Warner

Time Warner’s (NYSE:TWX) Warner Bros. Interactive Entertainment, along with TT Games and The LEGO Group, has recently announced the launch of a new game – Lego Dimensions. The division we label as Consumer Products & Other, includes Warner’s video games, along with other licensing revenues. Lego Dimensions is based on similar strategy of combining different characters/stories as in Infinity and Skylanders. It will be interesting to see how the game is received in the toys-to-life gaming space. Recently, Disney (NYSE:DIS) launched third generation of Infinity in same martket and included Star Wars to the offering, thereby making it more appealing to gamers. For Warner, the segment revenues have seen double-digit growth in the past few years and it is likely to continue this trajectory amid an increased push for video games. In fact, Time Warner may be able to generate more revenues that we forecast from video games and licensing of its massive DC Comics library. If the upside adds incremental revenues of $2 billion over our current forecast, it could trigger a 5% increase to the stock, according to our model.

See our complete analysis for Time Warner

A Snapshot of Time Warner’s Consumer Products Business

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Warner Bros. leverages its characters and content to license their names, images, logos and other representations, both domestically and internationally. These licenses are sold to publishers, retailers, theme parks and manufacturers of consumer goods. Also, the segment generates revenues through the development and distribution of videogames. The studio released several games in 2015, including Batman: Akhram Knight, Mad Max, Lego Jurassic World and Lego Dimensions, among others. The studio is also developing a video game based on HBO’s popular TV series – Game of Thrones.

Some of these games were well received by gamers. In fact, Batman: Akhram Knight was second highest selling game of 2015 by July. according to NPD. [1] Now the recently launched Lego Dimensions have so far seen good reviews. [2] The game will allow merging physical Lego brick building and interactive console gameplay with 14 universes. This is interesting and somewhat a trend now seen in gaming where gamers like to combine various characters from different franchises into one gaming adventure. Skylanders and Disney’s Infinity found massive success on similar grounds (also see – Disney: Star Wars Presence At Infinity 3.0 May Be Enough To Revive Video Game Sales, But Significant Growth Unlikely). Given the popularity of various DC Comics characters and the universes that are being included in Lego Dimensions, it is likely to see some success in the market. Having said that, it is competing with some of the popular games in the toys-to-life arena.

Growth In Gaming Industry And Warner’s Massive Content Library Can Catalyze The Segment Growth, Leading To A 5% Upside

Looking at the segment revenues, they have grown at an average annual rate of 12% in the last 5 years, from $1.45 billion in 2009 to over $2.3 billion in 2014. [3] This growth was led by Warner’s successful video games and licensing of various characters from its universe and we believe it will continue to grow in the coming years, owing to the same factors. Warner’s DC Comics characters, such as Batman, Green Lantern, Superman, Wonder Woman and Nightwing (among others) are extremely popular and the studio can continue to capitalize on them by publishing more games and licensing the characters in the international market. Growth in the global video game industry will further augment revenues. Overall industry revenue is expected to grow from $83.6 billion in 2014 to $107 billion in 2017, according to a research by Newzoo. [4]

Accordingly, we estimate the revenues to be north of $3.75 billion by the end of our forecast period (towards 2022). An estimated EBITDA margin of over 19% will translate into EBITDA of $715 million, representing around 5% of the company-wide EBITDA. However, higher than expected growth in consumer products segment (led by more video games and licensing) could spur growth in the segment revenues and translate into a 5% upside to our price estimate for Time Warner. Here, we estimate the segment revenues to be north of $5.75 billion by 2022. Profit growth will not only come from higher revenues but also from higher EBITDA margins.

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Notes:
  1. BATMAN: ARKHAM KNIGHT WAS JUNE’S BEST SELLING GAME, IGN, Jul 16, 2015 []
  2. LEGO Dimensions Review Roundup, GameStop, Sep 26, 2015 []
  3. Time Warner’s SEC Filings []
  4. Worldwide video games market will grow 9.4 percent this year, says report, Polygon, Apr 22, 2015 []