Time Warner Takes Stake in Hulu, Beats Quarterly Profit Expectations

Power 100:  Jeff Bewkes - Getty-H 2016
Francois G. Durand/Getty Images

The company's financial results were better than expected on the bottom line but a little soft on the top line.

Time Warner on Wednesday said it purchased a 10 percent stake in Hulu and that the conglomerate's Turner unit agreed to an affiliate deal that will put all of its channels on Hulu's live-streaming service that is set to launch early next year.

Time Warner paid $583 million for its stake in Hulu, a price that values the entire enterprise at $5.8 billion.

The Jeff Bewkes-led company's announcement coincided with the release of its quarterly financial results, which were better than expected on the bottom line but a little short on the top line. Time Warner also raised its full-year guidance by a nickel, saying it expects to earn as much as $5.45 per share.

Wall Street's initial reaction to the financial results and Hulu investment was positive Wednesday as shares of Time Warner were up 3 percent prior to the opening bell.

The investment in Hulu, which some had been expecting for months, comes amid concerns that U.S. consumers are tiring of paying for large bundles of cable TV channels, many of which they rarely watch. Hence, digital services like Hulu are thriving in an era marked by cord-cutting and skinny bundles.

Reports surfaced in May that Time Warner was interested in taking equity in Hulu. Back then, The Wall Street Journal reported Time Warner was negotiating to be an equal partner with existing investors, NBCUniversal, Walt Disney and 21st Century Fox/News Corp.

Time Warner did not disclose what it paid for its 10 percent position in Hulu, a product that competes with Netflix, Amazon Prime and other digital VOD platforms. Bewkes said his company does not get a board seat at Hulu, so it will not have an active role in its governance.

Time Warner's HBO also has its own digital product called HBO Now, which launched last year, and Bewkes said he intends on further investments and partnerships in the digital space.

"Consumers clearly want innovative interfaces, more robust on-demand capabilities, and they expect a greater variety of content packages, and we want to support services that do just that," Bewkes said Wednesday during a conference call.

"We expect there will be a number of additional virtual MVPDs that launch over the coming year, and we think that the increase in choices available as a result of these new services will be great both for consumers and for our industry's leading brands."

Time Warner said revenue in the second quarter fell 5 percent from a year earlier to $7 billion while profit fell 2 percent to $952 million. On a per-share basis, the company earned an adjusted $1.29 while analysts expected $1.16.

Of Time Warner's three segments — Turner, HBO and Warner Bros — only the latter posted falling revenue, from $3.3 billion a year ago to $2.7 billion this time around. The company said the decline was due to falling sales in video games, TV licensing and home entertainment, which last year was buoyed by the popularity of American Sniper.

Bewkes, though, was very enthusiastic about the studio's film slate, in particular Fantastic Beasts and Where to Find Them from J.K. Rowling, due Nov. 18.

Revenue at Turner rose 6 percent to $3 billion as domestic subscription rates rose while the number of subscribers fell by roughly 2 percent in the U.S. "CNN," said Bewkes, "has gone through nothing short of a renaissance over the past few years."

"To date, 2016 is the most-watched year in CNN's history," he added.

Revenue at HBO was up 2 percent to $1.5 billion, with Game of Thrones, Silicon Valley and Veep each growing viewership by double-digits courtesy of HBO's digital platforms.