Time Warner’s Q4 Earnings Bolstered By Subscription Growth At HBO

Time Warner’s (NYSE:TWX) Q4 earnings were above street estimates led by better performance of HBO. While the media industry is facing  headwinds from declining subscribers, HBO continues to post solid subscriber growth. The network added around 2 million subscribers on television and 800,000 at its new streaming service – HBO Now – in 2015. HBO continues to be the driving force for Time Warner and will remain so in the coming years, led by its unparalleled content, in our view. (See – How Important Is HBO For Time Warner?) The company’s management stated that HBO’s subscription revenues will grow at a high-single-digits rate in the coming years. ^[1] For the quarter, segment revenues were up 6% while operating income was flat at $393 million.

Turner Networks benefited from higher ratings at CNN and the Cartoon Network. CNN Q4 ratings were up 30% in key demographics while the Cartoon Network was the only kids network to post ratings growth in 2015. ^[2] While the segment revenues grew 2%, operating income declined 15% due to higher programming costs. The company’s management stated that Turner has successfully renewed its carriage deal with its top 10 affiliates on higher rates, which will drive the revenue growth in the coming years. ^[1] Subscription revenues for Turner Networks 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 over  the next few years, and estimate subscription revenues will be around $6 billion by the end of our forecast period (in 2022). This can be attributed to the rapid growth of alternative video platforms, which will likely impact Turner’s subscriber base. In fact, TNT’s penetration among U.S. pay-TV households has already come down from around 96% in 2010 to around 90% in 2015 while digital video platforms, such as Netflix have seen 3x subscriber growth. Accordingly, we estimate a slight decline in Turner’s subscriber base, which will be offset by continued affiliate pricing growth (also see – What Factors Can Drive Growth At Time Warner’s Turner Networks?).

Looking at the studio business, revenues declined 13% while operating income was down 5% in Q4. The decline in revenues was on expected lines due to a tough comparison with the prior year quarter, which included a big hit – The Hobbit: The Battle of the Five Armies. The studio will likely do well in the coming years led by its solid DC Comics slate, which includes  Batman v Superman: Dawn of Justice and Wonder Woman, among others. Also, the studio will surely benefit from its Harry Potter franchise. The studio is coming up with Fantastic Beasts movie series, which is a prequel to Harry Potter series. In fact, yesterday, JK Rowling, the renowned author of Harry Potter, announced a new book on Harry Potter series. However, the author clarified that it is not a prequel or sequel to the original series but stars the same Harry Potter characters. ^[3] The book is titled – Harry Potter and the Cursed Child and Warner could eventually come up with a movie series on the same. It should be noted that Harry Potter is an extremely popular franchise with more than 73 million followers on Facebook. If Warner does come up with a movie series on the new book in future, it is safe to assume that it will be a big hit. Previous installments of these movies have done well at the box-office and there are no signs of demand fading away. And this strengthens our view that the studio business will continue to provide a steady growth for Time Warner in the foreseeable future.

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1. Time Warner (TWX) Jeff Bewkes on Q4 2015 Results – Earnings Call Transcript, Seeking Alpha, Feb 10, 2016 [↩] [↩]
2. Cable News Ratings: CNN on the Rise in 2015; Fox News Channel Remains Dominant, Variety, Dec 30, 2015 [↩]
3. J.K. Rowling Clarifies We’re Not Getting A New ‘Harry Potter’ Novel, The Huffington Post, Feb 11, 2016 [↩]