What Factors Can Drive Growth At Time Warner’s Turner Networks?

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Time Warner’s (NYSE:TWX) Turner Networks – which include TNT and TBS – have seen steady revenue growth in the past few years, primarily driven by increased pricing and strong performance in international markets. However, viewership in the U.S. has declined in the past few quarters due to competition from digital video platforms such as Netflix and Hulu. Despite the changing media landscape, networks such as TNT and TBS continue to be among the top-rated cable networks due to their popular shows and sports programming. The new management at Turner Networks is focused on transforming these networks to better compete with the likes of AMC and HBO. In this note we discuss Turner Networks’ subscription and advertising growth, as well as the factors that will fuel growth in the coming years.

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Subscription Growth To Slow, Sports Will Aid Advertising Growth

Turner Networks include TNT, TBS and CNN among others. In our model we provide estimates for subscription and advertising revenues for TNT, TBS and CNN in the U.S. while other smaller networks and international revenues are labeled as International & Other. Subscription revenues for Turner Networks have been trending well, and have grown at an average annual rate of 7% in the last five years to an estimated $4.6 billion in 2015. This can be attributed to strong performance in international markets and subscription pricing growth in the U.S. However, we expect the growth rate to slow down in the next few years, and estimate subscription revenues to be around $6 billion by the end of our forecast period (in 2022).

Revenues will see continued pressure from the rapid growth of alternative video platforms, which will likely result in lower penetration levels for Turner Networks in the coming years. For instance, TNT’s penetration among U.S. pay-TV households has come down from around 96% in 2010 to around 90% in 2015. During the same period, Netflix has seen 3x growth in its subscriber base. As more people embrace streaming options, pay-TV subscribers are likely to decline in the coming years, which will impact Turner Networks’ subscriber base. However, that decline will be offset by continued subscription and pricing growth in international markets.

Turner Networks’ advertising revenues have been hovering around $4.5 billion in the last few years. While there has been more growth in international markets on a constant currency basis, that was offset by the strengthening of the U.S. dollar. Turner Networks’ domestic advertising is aided by its sports programming, including the NBA and MLB. These sports programming contracts are long-term in nature, with the MLB contract running until 2021 and the NBA’s deal with TNT running through the 2024-25 season. Beyond sports programming, Turner Networks is investing more in original programming and aims to transform some of its networks into more edgy networks that compare with the likes of AMC and HBO. While the ratings for new shows will be the true test of Turner’s efforts, it surely is a step in the right direction. Given these factors, we estimate the advertising revenues to grow in mid-single digits to north of $6 billion towards the end of our forecast period, translating into overall Turner revenues of over $12 billion. An estimated EBITDA margin of 38% will translate into EBITDA of over $4.7 billion, representing 35% of estimated company-wide EBITDA.

Considering this expected growth trajectory for Turner Networks, the question arises – what is the value of Turner for Time Warner? The table below provides an estimate:

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