Time Warner Earnings Beat Estimates as HBO Posts Record Quarter

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Jeffrey Bewkes

The company says its planned sale to AT&T is on track to close this year as Warner Bros. handily exceeds expectations thanks to the likes of 'The Lego Batman Movie,' but Turner ad revenue and subscribers drop.

Time Warner, the entertainment conglomerate behind Warner Bros., HBO and the Turner TV networks that has agreed to be acquired by AT&T for $85.4 billion, on Wednesday reported improved first-quarter earnings that exceeded Wall Street estimates.

The company, led by CEO Jeffrey Bewkes, reported adjusted earnings from continuing operations of $1.66 per share, compared with $1.49 in the year-ago period and the $1.44 Wall Street consensus estimate. Operating income increased 4 percent to $2.1 billion, with adjusted operating income up 7 percent. Revenue rose 6 percent to $7.7 billion.

Most company financials exceeded Wall Street expectations, but Turner's advertising revenue dropped, instead of reaching the expected slight gain, amid lower ratings and subscribers also declined, providing fodder for possible earnings conference call questions about the impact of cord cutting.

Analysts expected the company's film unit's profitability to be down from the first quarter of 2016, HBO to be up and Turner to remain roughly unchanged. Instead, Turner posted an adjusted profit decline, while HBO and Warner Bros. recorded higher profits in the latest period. HBO reached record quarterly operating income and adjusted operating income.

"We’re off to a strong start to 2017, as we continue to benefit from the investments we’re making in the best content while also developing new revenue streams that will drive growth and meet consumer demand for great experiences built around their favorite programming and brands," Bewkes said. "Looking ahead, we remain on track, pending completion of regulatory reviews and receipt of consents, to close our merger with AT&T Inc. before the end of 2017. We remain excited about the potential for this combination to accelerate the pace of innovation in our businesses.”

On the quarterly earnings conference call, Bewkes said the latest results are proof of the success of the company's focus on being “home to the world’s best video content” and distributing it in new ways.

In terms of the quarterly results, Bewkes praised HBO, saying: “Home Box Office shined in the quarter highlighted by our limited series Big Little Lies, which was both a critical and cultural breakout. Last Week Tonight With John Oliver is having its most-watched season to date, and we recently had the much anticipated returns of Silicon Valley and Veep."

And addressing the film and cable TV networks units, he said: "Warner Bros. delighted audiences in both film and television, with global hits in Kong: Skull Island and The Lego Batman Movie and more series across broadcast for the current season than any other studio. Turner had another successful airing of the NCAA Division I Men’s Basketball Tournament across platforms, while CNN grew its total day ratings by 21 percent among adults 25-54."

CNN's performance and outlook amid the strong ratings for news networks early in President Donald Trump's tenure are also expected to get some attention on the earnings call.

HBO first-quarter revenue increased 4 percent to $1.6 billion, driven by higher domestic rates and subscribers and international growth, partially offset by a decrease in content and other revenue, primarily due to lower home entertainment revenue.

HBO's operating income jumped 22 percent to $583 million thanks to the higher revenue and lower selling, general and administrative, programming and distribution expenses. Programming costs decreased 2 percent, "reflecting lower original programming expenses related to a reduction in amortization resulting from using a longer estimated utilization period for original programming beginning in the second quarter of 2016, partially offset by higher acquired theatrical programming expenses," the company said.

Bewkes on the earnings call spoke of "very healthy" subscriber growth for HBO's streaming service HBO Now.

Warner Bros. quarterly revenue rose 8 percent to $3.4 billion, primarily due to higher TV and theatrical revenue, partially offset by lower video games revenue. Theatrical revenue grew due to an increased number and the mix of box-office releases, as well as higher home entertainment revenue, primarily related to the release of Fantastic Beasts and Where to Find Them. TV revenue increased primarily due to higher domestic licensing revenues related to library series.

Warner Bros. operating income jumped 15 percent to $488 million due to the higher revenue, partially offset by higher associated theatrical and TV costs and print and advertising expenses.

Turner first-quarter revenue rose 6 percent to $3.1 billion as content and other revenue jumped 16 percent and subscription revenue rose 12 percent, while advertising revenue fell 2 percent. The ad drop was "primarily due to lower delivery at certain domestic networks, partially offset by increases at Turner’s sports and news businesses and growth at Turner’s international networks," the company said. Subscription revenue benefited from "higher domestic rates and growth at Turner’s international networks, partially offset by lower domestic subscribers."

Turner operating income fell 6 percent to $1.2 billion as the higher revenue was more than offset by higher expenses, mainly due to higher programming costs, including higher sports costs related to the first year of Turner’s new agreement with the NBA and higher original programming costs.

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