Time Warner Beats Fourth-Quarter Earnings Estimates, Misses on Revenue, Raises Outlook

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The entertainment conglomerate, led by CEO Jeff Bewkes, also raised its dividend, but its stock declined in pre-market activity.

Time Warner CEO Jeff Bewkes acknowledged multiple times on Wednesday that "the shift to on-demand consumption is accelerating," but said his company is well-positioned for the change given its focus on content creation.

The shift Bewkes spoke of during a conference call has been sinking the stocks of major entertainment conglomerates as investors worry about competition from Amazon.com, Hulu, Netflix and others. On Wednesday, Disney and Viacom each touched a 52-week low while Time Warner shares sunk 5 percent.

Bewkes tried to calm Wall Street's nerves by noting that Time Warner has transformed itself into "a high-quality video business with global scale," so a consumer switch to digital simply means there are more bidders for Time Warner's content.

The company's strategy also includes beefing up HBO Now, its online product. Bewkes said to expect more content and marketing around HBO Now, and he expects an increase in cable providers looking to bundle HBO with HBO Now. 

Executives on Wednesday also disclosed that there were 800,000 HBO Now subscribers at year's end, but when an analyst re-framed the number as "only 800,000" HBO CEO Richard Plepler took offense.

"I wouldn't say 'only 800,000 HBO Now subs," Plepler shot back. "We're just getting started, as I said earlier, I think we're going to make a lot of progress as we put new content on and get onto new platforms."

"As our deals come up for renewals," Plepler continued, "I think we'll see different kinds of packaging. But listen, if they want to sell HBO through skinny bundles, fantastic. If they want to sell HBO through triple-plays, fantastic."

Given the opportunity to do so, Bewkes didn't shoot down the notion that Time Warner might consider an investment in Hulu, the service owned by NBCU, Disney and 21st Century Fox. "We are actively pursuing opportunities outside the ecosystem," Bewkes said. 

The remarks came as Time Warner reported better-than-expected fourth-quarter earnings, but revenue fell short of Wall Street expectations. Warner Bros. reported its highest full-year profit ever.

Warner Bros. and Turner posted lower quarterly profits, while HBO's profitability was unchanged in the quarter. Warner Bros. posted both lower revenue and lower adjusted operating profit amid weaker box-office results than in the year-ago period due in part to the disappointing performances of Pan and In the Heart of the Sea.

All this led total adjusted operating income, one profitability metric that Wall Street looks at, to decline 12 percent to $1.4 billion. Meanwhile, higher and better-than-expected quarterly net income and earnings per share came amid lower restructuring charges after layoffs in late 2014 and other corporate-level factors.

Also on Wednesday, Time Warner predicted 2016 earnings would come in better than it had said in a recent guidance downgrade. Three months ago, it had targeted adjusted earnings per share from continuing operations of around $5.25 for 2016, below the analysts' consensus figure of $5.60 per share and a previous company target of around $6. That led to a big drop in its stock, but it said at the time that it was still finalizing its forecast.

On Wednesday, it said it would reach earnings of $5.30-$5.40 per share in 2016, compared to the latest Wall Street consensus estimate of $5.26. That would mean growth of up to 14 percent over 2015.

The conglomerate also raised its dividend by 15 percent and said its board has authorized an additional $5 billion in stock buybacks. On an annual basis, Time Warner's regular cash dividend on its common stock will grow from $1.40 per share to $1.61 per share.

The Hollywood giant posted adjusted earnings per share of $1.06, compared with 98 cents in the year-ago period. Wall Street had on average forecast earnings per share of $1.01. Time Warner's fourth-quarter net income came in at $857 million, compared with $718 million in the year-ago period.

Several factors helped drive earnings higher despite the weaker results at Warner Bros. and Turner. The company, for example, posted lower restructuring and severance costs of $29 million, versus $166 million, as well as lower asset impairment charges of $17 million versus $38 million.

The conglomerate missed revenue forecasts, as did rival Viacom a day earlier, by reporting quarterly revenue of $7.1 billion, down 6 percent, or about $450 million below expectations. A 15 percent decline at Warner Bros. was only partially offset by increases at HBO and Turner, the company said.

“We had another very successful year in 2015, demonstrating once again Time Warner’s ability to deliver strong financial performance as well as creative and programming excellence,” Bewkes said. “All three of our operating divisions increased revenue and profits while also investing to capitalize on the shift to on-demand viewing and growing worldwide demand for the very best video content.”

Bewkes added that "Warner Bros. had its best year ever in video games, led by Mortal Kombat X and Batman: Arkham Knight, and remained the number one supplier of broadcast television programming, including the biggest new hit of the TV season in Blindspot."

Warner Bros.' theatrical performance was weaker in the fourth quarter. Its films in the period included Creed and Point Break while In the year-ago period the studio benefited from the theatrical performance of The Hobbit: The Battle of the Five Armies, Interstellar and Annabelle, which exceeded expectations.

Film revenue for the quarter fell 13 percent to $3.3 billion amid the theatrical revenue drop and foreign-exchange impacts. Adjusted operating income for the film unit dropped 5 percent to $373 million, due to the decline in revenue "partially offset by lower restructuring and severance charges and theatrical valuation adjustments."

Bewkes, though, expressed enthusiasm for this year's releases, in particular Batman Vs. Superman next month, which he said will set off "a multiyear slate of franchise films."

HBO fourth-quarter revenue rose 6 percent to $1.4 billion due to an increase of 3 percent in subscription revenue and a 20 percent improvement in content and other revenue. Adjusted operating profit was essentially unchanged at $393 million as the higher revenue was offset by higher expenses. Bewkes said during the conference call Wednesday that HBO's plan is to increase the amount of original programming on HBO by 50 percent globally.

Turner fourth-quarter revenue climbed 2 percent to $2.7 billion due to a 5 percent advertising increase driven by U.S. growth and local currency growth at international networks, partially offset by the impact of foreign exchange rates. The domestic ad increase was due to growth at Turner’s news business and the airing of the MLB playoffs, including additional games in the quarter. Turner also acknowledged lower subscribers in the latest quarter and adjusted operating income decreased 15 percent to $781 million.

MKM Partners analyst Eric Handler called fourth-quarter results "mixed" due to the earnings beat and the lower-than-expected revenue, adding that "higher '16 earnings per share guidance and 15 percent dividend increase are positives."

Email: Paul.Bond@THR.com

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