Time Warner's Earnings Beat Estimate - Analyst Blog

Time Warner Inc. TWX posted first-quarter 2014 earnings of 91 cents a share that surpassed the Zacks Consensus Estimate of 88 cents and increased 20% from the prior-year quarter earnings of 76 cents, reflecting strength across Turner, Home Box Office (HBO) and Warner Bros.

However, including one-time items, quarterly earnings came in at $1.42 per share, substantially up from 79 cents earned in the year-ago quarter.

This Zacks Rank #3 (Hold) stock now anticipates low teens growth in earnings per share for 2014, after taking into account the divestiture of Time Inc., which is expected to conclude in the second quarter of 2014.

Time Warner's total revenue of $7,545 million jumped 9% year-over-year, and surpassed the Zacks Consensus Estimate of $6,755 million. The company's investments in content and technology in the recent years have boded well.

Adjusted operating income increased 7% to reach $1,536 million, whereas adjusted operating margin contracted 100 basis points to 20%.

In a strategic move to unlock the value of its core business activities, Time Warner decided to go ahead with its plan to spin off Time Inc. magazine into a separate, publicly traded company. The move to shed Time Inc. followed the negotiation between Time Warner and Meredith Corp. MDP to create a magazine based company, which eventually did not materialize.

Excluding Time Inc., revenue grew 10%, while adjusted operating income climbed 12%. On the other hand, earnings came in at 97 cents compared with 77 cents a share in the prior-year period.

The decision would facilitate Time Warner to concentrate purely on television networks and film and TV production businesses. The decision would be accretive to the shareholders of Time Warner in the same fashion, when this diversified media conglomerate divested Time Warner Cable Inc. TWC and AOL Inc. AOL into independent companies.

Segment Details

Turner division's revenue rose 5% to $2,593 million, driven by growth of 7% in subscription revenue and 5% in advertising revenue. Adjusted operating income for the segment grew 3% to $895 million attributable to rise in revenue, partially offset by higher programming costs.

Higher subscription revenue was primarily attributed to rise in domestic rates and international growth. Advertising revenue gained due to growth witnessed at Turner's domestic and international entertainment networks on account of rise in pricing.

Time Warner's HBO segment revenue grew 9% to $1,339 million driven by growth of 8% in subscription revenue and 13% in Content revenue. Higher subscription revenue was primarily attributed rise in domestic rates and the merger of HBO Asia and HBO Nordic. On the other hand, Content revenue increased on account of rise in home video revenue benefiting from sales of Game of Thrones: The Complete Third Season.

Adjusted operating income for the division jumped 11% to $464 million principally attributable to rise in revenue, partially offset by increase in programming and distribution costs.

Warner Bros. revenue jumped 14% to $3,066 million resulting from sturdy theatrical slates, higher videogames revenue, rise in initial telecast revenue and jump in international television licensing revenue.

Adjusted operating income for the division surged 43% to $380 million on account of increased revenue, partly offset by increased associated film costs.

Time Inc. revenue inched up 1% to $745 million gaining from the acquisition of Time Inc. Affluent Media Group in the fourth quarter of 2013 and certain weekly titles having one extra issue. Subscription revenue increased 5%, partly offset by 11% decline in Other revenue. Advertising revenue remained flat. Excluding the acquisition of Affluent Media Group, revenue would have declined 5%.

The segment registered adjusted operating loss of $94 million compared with operating loss of $9 million in the year-ago quarter.

Other Financial Aspects

Time Warner ended the quarter with cash and cash equivalents of $3,546 million, long-term debt of $20,226 million and shareholders' equity of $30,044 million.

During the quarter, Time Warner incurred capital expenditures of $99 million and generated free cash flow of $1,681 million. From Jan 1, 2014 through Apr 25, the company bought back about 20 million shares, aggregating approximately $1.3 billion. The company's board in Jan 2014 authorized a share repurchase program of $5 billion.