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Time Warner's Earnings Beats Estimate

Zacks Equity Research

Time Warner Inc. (TWX) posted second-quarter 2013 earnings of 83 cents a share that surpassed the Zacks Consensus Estimate of 75 cents and surged approximately 46% from 57 cents earned in the prior-year quarter due to strength witnessed across Film and TV Entertainment and Networks segments, and lower shares outstanding.

However, including one-time items, quarterly earnings came in at 81 cents a share, up substantially from 42 cents earned in the year-ago quarter.

This Zacks Rank #3 (Hold) stock now anticipates mid-teens growth in earnings per share for 2013. The current Zacks Consensus Estimate for 2013 is $3.68, reflecting an increase of about 12% year-over-year. The company’s investments in content and technology in the recent years have boded well.

Time Warner’s total revenue in the quarter jumped 10% to $7,435 million from the prior year-quarter, and came ahead of the Zacks Consensus Estimate of $7,123 million.

Adjusted operating income increased 25% to reach $1,512 million, whereas adjusted operating margin expanded 200 basis points to 20%.

In a strategic move to unlock the value of its core business activities, Time Warner decided to go ahead with its plan to spin off Time Inc. magazine into a separate, publicly traded company. The move to shed Time Inc. followed the negotiation between Time Warner and Meredith Corporation (MDP) to create a magazine based company, which eventually did not materialize.

The decision would facilitate Time Warner to concentrate purely on television networks and film and TV production businesses. The decision would be accretive to the shareholders of Time Warner in the same fashion, when this diversified media conglomerate divested Time Warner Cable Inc. (TWC) and AOL Inc. (AOL) into independent companies.

Segment Details

Networks division’s revenue, which includes Turner Broadcasting and HBO, rose 7% to $3,841 million, driven by growth of 4% in subscription revenue, 11% in advertising revenue and 5% in content revenue. Adjusted operating income for the segment increased 13% to $1,265 million attributable to growth in revenue, partially mitigated by 8% jump in programming costs.

Higher subscription revenue was primarily attributed to rise in domestic rates and international growth. Advertising revenue gained due to growth witnessed at Turner’s domestic entertainment networks on account of rise in pricing, robust demand for the NBA Playoffs on TNT and the timing of the 2013 NCAA tournament, partially offset by shutdown of TNT television operations in Turkey.

Time Warner’s Film and TV Entertainment segment revenue surged 13% to $2,941 million due to sturdy theatrical performance of Man of Steel, The Hangover Part III and The Great Gatsby, rise in international television syndication and higher subscription revenue from video-on-demand, partly offset by a fall in domestic television licensing revenue.

Adjusted operating income for the division, which comprises Warner Brothers, soared 34% to $184 million principally attributable to revenue growth, partially offset by increase in associated film costs, and higher advertising and restructuring and severance charges.

Publishing revenue fell 3% to $833 million due to 7% decline in Subscription revenue and 5% fall in advertising revenue, partially offset by 23% growth in Other revenue. The segment operating income came in at $124 million, reflecting growth of 28% due to reduced expenses.

Other Financial Aspects

Time Warner ended the quarter with cash and cash equivalents of $2,063 million, long-term debt of $19,129 million and total equity of $29,783 million.

During the quarter, Time Warner incurred capital expenditures of $99 million and generated free cash flow of $868 million. From Jan 1, 2013 through Aug 2, 2013, Time Warner bought back 32 million shares, aggregating $1.8 billion under its share repurchase program of $4 billion announced in Jan 2013, overriding the previous authorization.

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