With so many different ways to access and consume video content, content providers are increasingly becoming even more crucial for distributors. Time Warner Inc (NYSE:TWX)‘s big and diversified portfolio of extremely valuable content assets are going to be more prized as newer distribution outlets emerge. The company’s investments in content creation for the buildup of high quality franchises positions the company well to monetize its production through Internet outlets and competing firms including Netflix, Inc. (NASDAQ:NFLX), Hulu and Amazon.com, Inc. (NASDAQ:AMZN).
Flat revenues but expanding Margins
Time Warner Inc (NYSE:TWX)’s revenues for the most recent quarter stood at $6.9 billion which is flat on a Y/Y basis. The firm’s operating income stood at $1.4 billion which represents a 13% Y/Y increase. The company’s operating margin expanded to 20% which is up from the 18% it delivered in 1Q12. And the net income for Time Warner Inc (NYSE:TWX) in Q1 2013 stood at $720 million, which is up from the year ago bottom-line number of $581 million.
The company’s diluted EPS increased to $0.75 compared to the year ago diluted EPS of $0.59. Time Warner Inc (NYSE:TWX)’s cash flow generation abilities are consistent; it generated operating cash flow of $729 million, and Free cash flow of $935 million in 1Q 2013. Under the newly authorized share repurchase program of $4 billion, it already bought back shares worth ~$870 million in Q1 2013. Most importantly, Time Warner is headed towards its 5th consecutive year of margin expansion which goes to show the value of content providers in an increasingly competitive environment from existing competitors including. as well as newer original content companies like Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN).
Strong momentum on TV Networks
Various TV channels under Turner’s portfolio are performing very well by ranking among the leading ad-supported cable networks during prime-time, as well as during the day. Revenues from the TV Networks business were up 3% on a Y/Y basis to hit $3.7 billion in Q1, primarily due to a 5% increase in subscription revenue owing to higher rates in the domestic market and overseas growth.
However, the advertising business saw some headwinds due to declines in revenues from the company’s News networks, due to lower demand. However, more users tune into CNN than any other news channel, and the management is working to keep users on CNN tuned in for longer time periods. Turner’s International arm is getting stronger; the company is projecting a rosy future with strong growth in operating earnings in the next few years primarily from LatAm, Eastern Europe and Asia. Turner Broadcasting and HBO combined churned out operating income of $1.27 billion in the first quarter of 2013.
The company’s strong content catalog is loved by audiences across the world, and it is very evident from the numbers. TBS’s The Big Bang Theory ranked as ad-supported cable’s number 1 comedy for adult viewers. HBO’s Game of Thrones is set to become the most watched show since The Sopranos with the beginning episodes of season 3 averaging a gross audience of 13.4 million. HBO has a strong line-up of other shows including VEEP, True Blood, The Newsroom and Boardwalk Empire. The online version of HBO, HBO GO is picking up users, registrations at a healthy clip as well.
HBO is exploring the idea of offering a broadband-only distribution plan with MVPDs, which will increase its distribution, as the company already employs this model in the Scandinavian region. HBO has got41 million HBO Cinemax subscribers in the U.S at the end of F’13.
Film entertainment has a strong lineup
Revenues of the Film and TV Entertainment business saw a 4% Y/Y decline to $2.7 billion. This decrease in revenue can be attributed to theater performances delivering lower than expected numbers and a decline in TV licensing revenues in certain overseas markets. However, the home video revenues portrayed strong performance owing to the success ofThe HobbitandArgo.The Hobbit pulled $1 billion in the global box office. However, Warner Bros. has a strong slate of theatrical releases in recent weeks withThe Great Gatsby,The Hangover 3,Man of Steeland the second part ofThe Hobbittrilogy.
Warner Bros. had a robust TV season with 4 out of the top 6 comedy shows under its belt includingThe Big Bang Theory,Two and a Half Men,Two Broke GirlsandMike & Molly. And Warner Bros. is also producing newer drama shows for TV. The segment’s operating income grew 23% on a Y/Y basis to $263 million in 1Q13. Half of Warner Bros. profits flow in from the TV production business. As a result, ~90% of Time Warner’s profits are coming in from the broader TV ecosystem.
Revenues from Internet subscription providers will be a significant contributor for the firm. The CW, which is the joint venture between Warner Bros. and CBS has been licensing a lot of content to Internet based distributors including Netflix. Time Warner generated over $350 million in SVOD revenues in 2012, and more than $100 million in Q1 of this year. Both Warner and Turner signed deals with both Netflix and Amazon.com, Inc. (NASDAQ:AMZN) to provide more serialized content.
And increasingly Netflix, Inc. (NASDAQ:NFLX) is becoming more selective in what it is trying to buy. Netflix walked away from its deal with, as Netflix can leverage its own status as an original content firm in licensing negotiations. However, it is possible that Netflix’s set audience of more than 36 million, might be more willing to drop their premium subscription services from HBO or CBS’s Showtime Networks. While Showtime, HBO and Netflix are often viewed as competitors, the increasing amount of original content produced by each of these firms is making their respective offerings vastly different, which reduces the competitive forces in the space.
Going Forward
Time Warner Inc (NYSE:TWX) is now a leaner and more focused global leader in the media and entertainment business at large, a material shift from its earlier days when it was a conglomerate wearing numerous hats. The company’s massive footprint across TV networks, Film entertainment on TV and theaters along with world-class brands gives the company a massive lead in its core business of video content.
The worldwide growth of overall video consumption along with number of pay TV subscribers and higher ARPUs in pay TV are encouraging signs for video content production, and Time Warner clearly leads the way. In addition, consumers are platform agnostic, in the way they view their video content, and Time Warner is expanding its mobile offerings by providing more content on both HBO Go and Max Go as well.
The article Time Warner: Content Is King? originally appeared on Fool.com and is written by Ishfaque Faruk.
Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Ishfaque is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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