HBO Now, CNN, Studio Business Likely Boosted Time Warner’s Q3 Earnings

November 3rd, 2015 by Trefis Team
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Time Warner

Time Warner (NYSE:TWX) will report its Q3 2015 earnings on November 4th. [1] The company likely benefited from its cable networks, including CNN, which posted a solid ratings uptick during the third quarter. HBO likely saw an uptick in revenues from its over-the-top streaming service. We will be looking for any update on the subscriber trends for the new service. Looking at Warner Bros., the studio benefited from the success of films such as Vacation, among others. However, currency headwinds may weigh on the segment’s bottom line. Separately, the company’s consumer products segment may do well amid the success of its new game – Lego Dimensions. We currently estimate revenues of about $29 billion for Time Warner in 2015 with EPS of $4.47, as compared to consensus of $4.68, compiled by Thomson Reuters.

See our complete analysis for Time Warner

Ratings Growth At CNN, HBO’s Streaming Service 

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CNN saw solid ratings growth in Q3, with a 36% jump in the primetime 25-54 demo, and up 7% in the total day demo. If we look at total viewers, CNN was up a whopping 47% in primetime as compared to the prior year quarter. [2] The benefits of this ratings growth surely boosted the company’s advertising income in the September quarter. While TNT and TBS also benefited from continued ratings for Rizzoli & Isles, Major Crimes and The Last Ship, the ratings for most of their shows were down from the prior year. [3] We currently estimate overall advertising revenues of around $4.7 billion for Time Warner in 2015 and an estimated EBITDA margin of 36% for cable networks will translate into EBITDA of $1.7 billion, representing more than 20% of the company-wide EBITDA.

HBO should also see higher revenues with continued subscriber growth. By the end of Q2, HBO Now had over 1 million paying subscribers on the iOS platform alone. [4] We currently estimate 5 million HBO Now subscribers by the end of the decade, and its impact on revenues is included in HBO International, Content & Other Revenues in our model. Looking at television, the network has seen steady subscriber growth in the past few years given the massive interest in its programming, including Game of Thrones and True Detective. HBO has been investing heavily into original programming, which has often been very successful for the network. This should help HBO continue its growth trajectory in the coming years. Also, since HBO is a premium network, there is no advertising associated with it. So there is a limited impact of television ratings on HBO, unlike other cable networks, which have a significant reliance on advertising income.

Studio Operations Likely Benefited From Higher Box Office

Warner Bros. raked in $615 million at the global box office during the September quarter, primarily led by the success of The Intern, Vacation and Magic Mike XXL. However, all of these movies were below the $200 million mark in terms of overall gross. This performance compares with a $440 million worldwide gross of prior year quarter releases. [5] Therefore, we expect a pickup in revenues during the third quarter. Having said that, currency issues could be a drag given that the dollar remained strong against other currencies, and studios usually derive a significant portion of revenues from international markets. We currently estimate the studio’s theatrical revenues to be around $2 billion for 2015, and an estimated EBITDA margin 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 movie and TV show production, licensing and electronic sales of the Warner Bros. studio. Looking forward, the studio has a solid slate with popular cast in the coming months, including Creed, Batman vs Superman and The Conjuring 2, among others.

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Notes:
  1. Time Warner’s Investor Relations [↩]
  2. Q3 2015 Ratings: CNN Up +36 Percent in Prime Time Demo, Adweek, Sep 29, 2015 [↩]
  3. TNT TV Show Ratings, TV Series Finale, Oct 21, 2015 [↩]
  4. Analysts: HBO Now already has about a million subscribers, Quartz [↩]
  5. Box Office Mojo [↩]