Time Warner Earnings Preview: What We Are Watching

Time Warner Inc (NASDAQ: TWX) is scheduled to announce its third quarter fiscal 2016 results on Wednesday, November 2. The company started the year on a strong note, with its earnings per share beating analyst estimates for two straight quarters of the year. Moreover, there was the announcement that AT&T has agreed to buy Time Warner for $86 billion recently, bringing the prospect of joining millions of AT&T wireless and pay-TV subscribers with Time Warner’s rich content and media lineup, including Turner networks, HBO and Warner Bros. film and TV studio.

In Q2 2016, the company’s revenue declined 5% year-over-year (y-o-y) to $7 billion and posted earnings of $1.29 per share, up 3% from prior year quarter. It also generated adjusted operating income of $1.8 billion.

CNN Posted Solid Ratings Growth

CNN saw solid ratings growth in Q3, with a 56% jump in the primetime 25-54 demo, and up 66% in the total day demo. If we look at total viewers, CNN was up a 48% in primetime as compared to the prior year quarter. ^[1] The benefits of this ratings should boost the company’s advertising income in the third quarter. On the other hand, TNT and TBS witnessed ratings declines for many shows including Rizzoli & Isles (-4.67%), Major Crimes (-12.37%) and The Last Ship (-30.88%). ((TNT TV Show Ratings, tvseriesfinale.com, Sep 2016))

HBO Plays An Important Role

HBO should also see higher revenues with continued subscriber growth. 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. We currently estimate overall revenues of around $6 billion for HBO in 2016 and an estimated EBITDA margin of 40% which will translate into EBITDA of $2.4 billion, representing more than 28% of the company-wide EBITDA.

AT&T – Time Warner Deal

AT&T (NYSE:T) recently announced its plans to acquire Time Warner in a half-stock and half-cash transaction valuing the latter at $107.50 per share. The deal’s total value is $108.7 billion after including Time Warner’s net debt. The deal could allow AT&T to use its internet and telecom services to distribute Time Warner’s movies and television programs, and give it a competitive edge over rivals such as Sprint (NYSE:S) and Verizon (NYSE:VZ). However, there is a chance that the deal is rejected by regulators, given Washington’s recent aversion to mega-mergers.

Guidance

In the upcoming third quarter earnings, Time Warner expects its total advertising revenue growth to be in the low-single digits. Reuters’ compiled analyst estimates forecast revenues of $6.98 billion and earnings of $1.37 per share in Q3 2016. We currently estimate revenues of about $29 billion for Time Warner in 2016 with EPS of $5.27, as compared to consensus of $5.43.

Have more questions on Time Warner? Please refer to our complete analysis for Time Warner

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1. Q3: CNN Has Best Quarters In Eight Years, cnn.com, Sep 2016 [↩]