Time Warner Inc. (NYSE:TWX), the world’s largest media conglomerate, is a classic example that tells us that sometimes in business, less is more. The company, formed from the merger between media titans Time and Warner, has grown as it shed excess business segments that weighed on its bottom line. Since the merger, Time Warner has spun off Time Warner Cable Inc (NYSE:TWC) and AOL, Inc. (NYSE:AOL) as separate companies. It also sold its books division.
Now, after posting strong fourth quarter earnings primarily attributed to higher network television fees and ad revenue, the company might sell a large portion of its underwhelming print media business. Wall Street definitely approves of this downsizing strategy to maximize profits, but should you? Let’s study the factors at play to gain a clearer perspective on Time Warner’s business.
Fourth Quarter Earnings and Guidance
In the fourth quarter, Time Warner posted adjusted earnings of $1.17 per share, topping the FactSet analyst consensus by 7 cents. However, revenue came in at $8.16 billion, missing the expected $8.22 billion.
For the full year, Time Warner expects to earn between $3.61 to $3.77 per share, in line with the analyst estimate of $3.66 per share.
Strong Growth in Television Networks
Time Warner’s primary growth driver during the fourth quarter was its television networks business, its largest business segment. Time Warner’s networks include cable channels TBS, TNT, CNN and premium network HBO.
Revenue at the television segment rose 5%. Distributor and subscription fees rose 7%, while ad revenue grew 3%. The robust growth was attributed to strong performance from new shows such as Dallas and returning ones such as Game of Thrones. HBO reported strong overseas growth, despite unfavorable currency impacts.
Royalties from online streaming providers, such as Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN), also generated additional revenue from older shows. HBO also has a solid mobile initiative, distributing its premium streaming content through its mobile platform, HBO GO, available on iOS and Android devices.
When Bilbo Met Harry…
Time Warner’s movie studio, Warner Bros., released several successful films in the fourth quarter, including Argo and The Hobbit, but revenue from these films could not match the earning power of the Harry Potter franchise. The final Harry Potter film was released in 2011, leading to steady revenue declines at the division.
The kids ask, ‘What’s a ma-ga-zine?’
Time Warner’s weakest spot was in print media, its smallest business segment. The segment produces well-known print magazines such as Time, Sports Illustrated, Fortune, Entertainment Weekly and People. The print business posted flat subscription revenue during the fourth quarter. Revenue at the segment, which declined 6.6% in fiscal 2012, has suffered from the paradigm shift from print to Internet media. Over the past decade, the segment’s revenue declined 40%.
As a result, the print media division started a round of 500 layoffs, dismissing 8% of its staff to balance costs with decreased demand. The workforce reduction and restructuring will cost an estimated $60 million charges by the end of the year.
Time Warner is reportedly considering a sale of several of its 21 U.S. magazine titles to Meredith Corporation (NYSE:MDP), the Iowa-based publisher of Better Homes and Gardens. Meredith is interested in acquiring female-centered brands InStyle and Real Simple, and not Time Warner’s core magazines – Time, Sports Illustrated and Fortune. Time Warner is also considering a joint venture with Meredith to spin off a new company focused on women’s publications.
Putting its cash to good use
During its fourth quarter earnings announcement, Time Warner also boosted its dividend by 11% to 28.75 cents per share, which continues its four-year consecutive streak of double-digit dividend increases. It also announced a new $4 billion stock buyback to reduce outstanding shares.
