Time Warner Q4 Profit Jumps 22% Driven by TV Unit

The entertainment giant's stock rises to its highest level in years after the company reported its biggest full-year revenue gain since 2004, increased its dividend and stock buyback program and predicted a record profit for Warner Bros. in 2011.

NEW YORK - Time Warner on Wednesday reported better-than-expected fourth-quarter financials driven by its TV networks unit and raised its dividend and stock buyback authorization.

Chairman and CEO Jeff Bewkes told analysts on a conference call that the strong results were the "continuation of a multi-year plan" to super-charge the now content-focused entertainment conglomerate, which previously shed AOL and Time Warner Cable. If the company's double-digit earnings growth forecast for this year comes true, it will mean that TW almost doubled its earnings within three years, he said.

Wall Street cheered the results as a sign that TW's content machine continues to fire on all cylinders after the stock had underperformed many peers over the past year. TW shares hit a new 52-week high of $35.15 earlier in the day - a level the stock hadn't reached since late 2007. The stock closed up 8.6 percent at $35.10.

“Time Warner had an outstanding year in 2010,” said Bewkes. “In 2011, we’re even more confident about how we’re positioned, and we'll be even more aggressive. We’ll increase our investments in programming, production and marketing even more than we did last year. We’ll keep pushing to accelerate new digital business models. We’ll keep expanding our presence in the most attractive international territories.”

The company posted a profit of $769 million, up 22 percent from $631 million in the year-ago period, or up from $610 million when focusing on continuing operations. Adjusted profit from operations rose 14 percent to $1.4 billion due to improvements in the TV networks and publishing units.

Revenue rose 8 percent to $7.8 billion driven by gains in the film and TV networks businesses. The latter recorded a 21 percent advertising revenue gain amid continued strength in TV ad sales.

For the full year 2010, TW's profit edged up 4 percent from $2.5 billion to  $2.6 billion. Adjusted operating profit amounted to $5.4 billion, up 17 percent and the highest in company history. Revenue climbed 6 percent to $26.9 billion, its highest growth rate since 2004.

For 2011, TW said it expects its adjusted profit per share from continuing operations to rise in the low teens off the $2.41 recorded for 2010.

The company on Wednesday also raised its quarterly cash dividend 11 percent - from 85 cents per share to 94 cents on an annualized basis. Plus, it reported it has boosted its stock buyback authorization to $5 billion. Its previously authorized buyback program had $1 billion remaining as of the start of the year. Analysts had predicted that TW may unveil such latest moves to reward shareholders.

CFO John Martin predicted that Warner Bros. will bring in a record profit this year as he touted its industry-leading returns and the upcoming DVD releases of the two final Harry Potter films. Management cited comedies and cable series as big focus areas for the TV production arm this year.

Bewkes, meanwhile, said TW may charge Netflix and Redbox more for its DVDs and confirmed the launch of a premium VOD film offer in the second quarter.

Film unit fourth-quarter revenue rose 10 percent to $3.6 billion thanks mainly to higher TV licensing fees. Operating income fell 2 percent to $427 million. Key film releases included Harry Potter and the Deathly Hallows Part 1, Due Date and Yogi Bear.

For the full year 2010, film revenue rose 5 percent, but the bottom line, which has been growing over the years but faced tough comparisons, was more of a mixed bag. The company said operating profit for the year rose 2 percent, but with adjustments, the figure declined 1 percent. Management had previously predicted film profit for the year would be strong, but didn't necessarily promise growth. “The impact of higher revenues and lower restructuring costs ($75 million) were more than offset by increased print and advertising costs, partly due to Warner Bros.’ move to self-distribute New Line releases internationally,” TW explained on Wednesday.

In TW’s TV unit, quarterly revenue rose 14 percent to $3.3 billion, with subscription revenue up 9 percent, advertising up 21 percent  - including a gain in the high teen percentage range in the U.S. - and content revenue up 25 percent. TV unit operating income grew 20 percent to $904 million. For the full year 2010, TV unit revenue rose 11 percent, and operating profit jumped 22 percent, or 18 percent on an adjusted basis.

Management on its call lauded what they said was record revenue and profit for HBO and TW's Turner networks in 2010.

HBO lost 1.6 million subscribers in 2010 due to the loss of non-revenue generating promotional users that TW had previously flagged when it predicted a 1.5 million customer decline for the year. But Martin signaled that HBO would add subscribers this year, and Bewkes highlighted that the more important focus for him is continued strong earnings growth at HBO, in which he expressed confidence. HBO will invest in more original content this year, which will see 12 originals, including Game of Thrones, as compared to 10 last year, executives said. Asked if HBO could make its HBO Go online service available on a stand-alone basis, Bewkes once again said that is possible, but emphasized it is "not something we are about to do today."

Management predicted strong advertising gains for 2011, highlighting that during last year's upfront ad market, Turner ad rates growth exceeded all broadcast networks in a sign that the gap between top cable networks and broadcast networks has further narrowed. Martin said first-quarter scatter ad prices are up in the solid double-digit percentage range.

Bewkes and Martin touted the NCAA men's basketball tournament, which is this spring coming to Turner networks in a partnership with CBS, and TBS late night show Conan, which Bewkes lauded as a "powerhouse." Early NCAA ad sales have been better than expected, Martin said.

Meanwhile, international TV assets will also continue to be key growth drivers, Bewkes said, predicting that international networks profitability would double to $1 billion over four years.

Bewkes also said that low-end cable content packages that the likes of Time Warner Cable have been rolling out or considering won't have "any material impact" on TW as they tend not to be very attractive to most consumers and TW's contracts limit penetration of this kind of  packages.

Evercore Partners analyst Alan Gould called the cable network ad growth in the latest quarter the key "standout number" of TW's latest earnings report. "This is an indication of how strong the upfront was for TW, which should flow through for the next couple of quarters, and the strength of the overall cable network advertising environment," he said. "This should be a positive read through to the other cable network companies - Viacom, Discovery Communications, Scripps Networks Interactive and News Corp.