Time Warner's Profits Rise as Advertising Rates Stabilize

With its pending merger with AT&T (T 1.88%) up in the air, Time Warner (TWX) posted fourth-quarter earnings results this week that paired broad sales growth with improving profitability. Each of its entertainment divisions benefited from popular content that the company successfully monetized through its many distribution channels.

Here's how the headline results compared to the prior-year period:

Data source: Time Warner.

What happened this quarter?

Operating results strengthened overall due to improving trends in Time Warner's broadcast networks, strong subscriber growth in its Home Box Office business, and rising video game sales.

Image source: Getty Images.

Highlights of the quarter included:

• The pace of decline in advertising revenue slowed for the second straight quarter. Ad sales ticked down by 2% across Turner's networks, compared to a 3% dip in the prior quarter and an 8% drop in the second quarter. Turner also notched significantly higher distribution fees, which more than offset a slight decline in overall pay-TV package subscribers.
• The Home Box Office segment managed double-digit gains in sales and profits thanks to an expanding pool of subscribers in both the domestic market and internationally.
• Warner Bros. studios announced rising revenue as growth in the video game segment offset a relatively weak showing at the box office. Earnings dipped in this segment, but overall Time Warner boosted operating profit by 13% to $1.9 billion.
• The large spike in net income and earnings per share was mainly due to a one-time benefit stemming from recent changes to U.S. tax law.

What management had to say

CEO Jeff Bewkes credited the entertainment giant's content portfolio with powering strong growth over the full fiscal year. "All three of our operating divisions increased revenue and profits [in 2017]," Bewkes said, "while also investing to capitalize on the growing demand for the most creative and compelling content as well as new ways to deliver it to audiences worldwide."

Executives highlighted wins from each of their core operating divisions, saying Turner broadcasting "continued to deliver exception value" to advertisers through healthy ratings at the TBS, TNT, Adult Swim, and CNN networks. HBO posted its "best subscription revenue growth in over 20 years," thanks to hits like Big Little Lies, Bewkes explained. Finally, the Warner Bros. unit had its best year yet, with global hits like Wonder Woman and Dunkirk pushing global receipts past $5 billion.

Looking forward

Bewkes and his team say they "remain excited" about the proposed merger with AT&T that they had believed would close before the end of 2017. The acquisition is now at risk as it goes through additional regulatory scrutiny.

While investors wait for resolution on that important issue, they have every reason to expect continued healthy growth from Time Warner. Specifically, executives are predicting robust sales gains at Turner, thanks in part to the advertising benefit the company will receive from broadcasting the NCAA Final Four games. HBO should have another record subscription year, they predict, even as content and programming costs moderate. As for Warner Bros., the studio segment is projected to expand further into record territory in 2018.

Overall, Time Warner is targeting adjusted operating income growth in the high single digits (should it remain a separate business for the full year). That would mark a slight acceleration over the past year's 7% profit increase.