Time Warner’s Earnings Weaker But Trends Remain Positive

Time Warner (NYSE:TWC) reported its Q1 2012 earnings last week. While the earnings were down compared to the same quarter last year primarily due to charges related to closure of a network in India, the revenues registered growth. The trends are generally positive and do not warrant any concerns. The revenues at both the media networks and filmed entertainment grew as we expected. ^[1]

Although we expected Time Warner to grow filmed entertainment revenues based on indications from Box Office Mojo (see Time Warner Earnings Looks For Broad-based Growth But Margins The Key), we were unsure regarding the margin growth. As it turns out, Warner Brothers’ margins grew. Media Networks performance was satisfactory, but there is opportunity to do better, especially with content licensing. Time Warner competes with other media giants such as Viacom (NASDAQ:VIA) Disney (NYSE:DIS) and News Corp (NASDAQ:NWS).

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Media Networks

Although TNT was a little down in terms of ratings, TBS performed significantly well. Furthermore, the company saw better performance in terms of viewership/ratings from Cartoon Network. We estimate that while Cartoon Network and TBS combined contribute a little under 10% to Time Warner’s value, TNT contributes a little over 10%. A better performance from these two networks alone would offset any decline from TNT. This implies that it is important for the company to improve and maintain the performance of TNT, and it plans to do so with its summer line up including four original shows. ^[2]

Additionally, HBO is making a good progress. The launch and expansion of HBO Go, streaming service for HBO, on several media devices has created a relatively more loyal subscriber base. According to a survey, about 93% of HBO subscribers feel more loyalty towards the premium channel as a result of this add-on streaming service. ^[2] We estimate that HBO is one of the prime value generating businesses for Time Warner, contributing almost 20% to its value.

One of the things that we noticed is that content revenues still form less than 10% of the total media networks revenues. ^[1] This proportion is even less than that for Q1 of 2011. Time Warner has not shown keen interest in licensing its content to alternative platforms such as Netflix (NASDAQ:NFLX). This is exactly where CBS (NYSE:CBS) is generating high margin dollars and enhancing its profits. There exists significant opportunity for Time Warner to leverage its content and boost its revenues as well as margins.

Our current price estimate for Time Warner stands at $40.20, implying a premium of over 10% to the market price. We are in process of reviewing our price estimate in light of recent earnings.

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1. Time Warner’s SEC Filings [↩] [↩]
2. Time Warner’s Q1 2012 earnings transcript [↩] [↩]