Time Warner Inc Beats Expectations on Strong Turner Performance

Time Warner Inc. (TWX) released its first-quarter results before market open today. The company recorded revenue of $7.1 billion and earnings per share of $1.19. Revenues came in 1.4% ahead of the average analyst estimate of $7 billion, as reported by Yahoo! Finance, while EPS came in 9% ahead of the average target of $1.09. Shares were 0.22% as of noon.

The results
Time Warner beat expectations and recorded solid performance in the first quarter. The period's revenues of $7.1 billion represented a roughly 5% increase from $6.8 billion in the year prior and were spurred on by key media events like the NCAA March Madness tournament. The company's adjusted earnings per share of $1.19 were up 23% year over year. The gains were driven by a  sales increase and adjusted operating income hitting a quarterly record of $1.8 billion on 13% growth. On the other hand, total operating income declined from roughly $2 billion to $1.79 billion, and net income declined from $1.29 billion to $970 million. 

The Turner network segment drove company performance in the quarter, with a 5% increase in revenues to $2.1 billion. The company recorded 4% advertising revenue growth, and the NCAA Tournament performed exceptionally well. The sports event recorded 8.3% growth in viewership across TBS, TNT, truTV, and CBS channels, and it was the most-watched NCAA tournament in 22 years. In viewership, the company's TBS channel ranked No. 1 in the quarter for the 18-49 demographic, as well as the  25-54 demographic.

The company also saw solid performance from its news outfits, with CNN growing total day viewership 20% over the quarter in the previous year, and HLN increasing viewership 33%. Subscriptions for the Turner segment declined, but revenue increased on higher subscription costs. The Turner Broadcasting System includes CNN, HLN, TNT, TBS, Cartoon Network, Turner Classic Movies, Adult Swim, truTV and Turner Sports. Its digital sports properties include bleacherreport.com, NBA.com, NCAA.com, and PGA.com. 

The 4% increase in Time Warner's HBO segment was driven mostly by increasing subscription rates, though the segment also saw higher home entertainment and international licensing revenues. Revenues for the quarter were $1.4 billion. The Warner Bros. entertainment segment posted revenues of $3.4 billion, representing a 4% increase over revenues in the previous year's first quarter. Gains came from strong sales of on-demand Friends episodes and increased video game sales. The Warner performance was also propelled by the success of American Sniper, which released in December and had grossed more than $540 million globally as of April 27.

Both Warner Bros. and HBO posted operating income declines, with gains at its Turner broadcasting network pushing performance. The HBO segment declined roughly 1.3% from $464 million to $458 million. Revenue gains were offset by higher production and marketing costs, with much of the increased advertising spend related to the launch of the company's streaming platform, HBO Now. HBO recorded strong performance for the return of its popular Game of Thrones series, which is also being used as a major selling point for HBO Now.

Operating income at its Warner Bros. wing dipped from $369 million last year to $324 million in this year's quarter, a roughly 12.2% decline. Gains in the Turner segment were more than enough to offset these declines, with operating income growing from $900 million to $1.1 billion, or an increase of roughly 23%.

What's next for Time Warner
For the Turner segment, performance will likely continue to rely heavily on sporting events as well as performances from TBS and CNN. The segment must continue to deliver high-quality content in order to justify increasing subscriber rates and to limit subscriber erosion amid heavy competition and new distribution models.

Warner has a strong line-up of entertainment properties to utilize and some key projects on the near horizon. The launch of the company's expanded DC Comics movie universe with 2016's Batman v Superman: Dawn of Justice will be a crucial moment for Time Warner's entertainment division. The movie will serve as the foundation for future entries in the movie universe, and its quality and reception will impact a big portion of Warner's film slate. Disney has achieved incredible success with its Marvel Cinematic Universe, and a similarly strong extended franchise would be a big asset for Time Warner. The company also has the opportunity to continue growing video game sales, as it makes use of key DC Comics characters and continues to build the success of LEGO video games.

HBO looks strong for the near future, with hugely popular shows like Game of Thrones and True Detective driving audience interest and critical acclaim. The network has done an impressive job of staying at the forefront of premium cable, and it will continue to be tasked with generating huge new series as its current batch of marquee properties age. The performance of HBO Now is also key for Time Warner, as it represents one of the first big steps in bridging HBO content outside of the traditional cable environment.

The company looks like it is on track to continue returning value to investors, having carried out $1.1 billion in buybacks from the beginning of 2015 through April 24, and authorization for an additional $3.4 billion in repurchases. Investors can also probably look forward to continued dividend increases on a near annual basis.