A Closer Look At Time Warner’s 2017 Performance
Time Warner Inc (NASDAQ: TWX) has had a fairly strong year, as both its earnings and revenues came in ahead of market expectations so far. In the first nine months of 2017, the company’s revenue increased 6% year-over-year (y-o-y) to $23 billion, primarily driven by growth in all divisions, particularly cable TV, HBO and film business. Time Warner’s operating income grew 3% y-o-y to $6 billion, and it also posted diluted earnings of $4.88 per share, which was a 7% y-o-y increase.
In 2017, the company benefited from investments in content across divisions, with the likes of Big Little Lies and Game of Thrones on HBO, films like Wonder Woman, and the NBA on TNT, to name a few. CNN saw solid ratings growth in the period as well, as it witnessed its highest ratings on record in Total Day among adults 25-54 and total viewers. The network grew 11% y-o-y in Total Day viewers. Among CNN’s bright spots, Anderson Cooper 360 was the net’s most-watched primetime series, marking its best numbers on record. In addition, HBO also witnessed accelerating subscription trends in this period.
On the AT&T (NYSE:T) and Time Warner merger, the deal still faces some roadblocks as the Justice Department sued in November to stop AT&T from buying Time Warner because of concerns that it could raise prices for rivals and pay-TV subscribers and obstruct the development of online video. As a result, Time Warner’s stock declined from levels of about $100 at the end of October, to the current ~$92 levels, as the markets priced in the mounting regulatory risks. A trial to decide the matter is set to begin on March 19.
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Growth In Turner
In the first nine months of 2017, Turner segment revenue grew 5% y-o-y to $9 billion, primarily due to growth in domestic affiliate renewals. The network’s subscription revenue increased 12% y-o-y in this period, due to higher domestic subscription revenues of $506 million. However, the segment’s operating income was down 2% y-o-y due to higher costs related to the AT&T merger as well as a higher marketing expenses.
HBO Grows On Higher Domestic and International Subscriptions
HBO’s revenues grew 6% y-o-y in the first nine months of 2017, driven by increased subscription revenues. This growth in subscription revenues was due to higher domestic subscription revenue of $267 million, reflecting higher contractual rates and increased subscribers, as well as higher international subscription revenues of $59 million, primarily reflecting growth in Europe. The segment’s operating income was up 12% y-o-y in this period.
Solid Performance by Warner Bros. Film Business
Time Warner’s studio operations are widely diversified with TV production, movies, electronic sales, video games and licensing. In the first three quarters, Warner Bros’ revenue increased 7% y-o-y, while operating income grew 8% y-o-y, led by its TV and theatrical businesses. The film studio collected $1.6 billion at the U.S. box office in the first nine months of 2017, primarily led by the success of The LEGO Batman Movie, Kong: Skull Island, Wonder Woman, It, Dunkirk, and Annabelle: Creation. Wonder Woman has so far grossed more than $400 million at the domestic box office, against a production budget of $149 million.
Future Outlook
In Q4, the company expects Turner’s total advertising revenues to increase in the low single-digits compared to the prior-year quarter. At Warner Bros, the company expects difficult comparisons from the release of Suicide Squad in Q4 2016. At HBO, it expects growth in subscription revenues along with an increase in programming costs, resulting in a net increase in the network’s operating income. For the full year, the company continues to expect its operating income to grow in the high single-digits (exclusive of any merger costs related to the AT&T acquisition).
Our $105 price estimate for Time Warner is around 10% ahead of the current market price.
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