Time Warner Optimistic About 2013 Despite A Flat First Quarter

| About: Time Warner (TWX)

By Sinduja Venkat

Despite sluggish first quarter results, Time Warner Inc. (NYSE:TWX) continues to hold an extremely upbeat outlook over the coming year. Indeed, 2013 will be action-packed for Time Warner with the tailwind of Time Inc. being officially spun-off as well as some highly anticipated new offerings coming out of its Studios segment. Whether investors will get to see a leaner and hence more powerful version of the company remains to be seen.

Q1 Results flat despite strong showing from TV Networks

On May 1st, the entertainment giant discussed the sluggish results for the first quarter of 2013. Revenue was compressed to $6,939 million, a 0.6 % drop on a YoY basis. The results are being attributed to poor showings from the company's Film & TV Entertainment and Publishing segments despite growth being observed in its TV Networks division. Net income increased by 23.5% to the tune of $720 million. This amounts to 75 cents a share, compared to figures of $583 million and 59 cents a share in the previous year. Operating income (adjusted) rose by 7% at $1,440 million and operating margin increased by 20.8%.

Good times up ahead

However, the outlook for this stock remains positive as the conglomerate has several revenue-boosting opportunities lined up over the coming months. The company believes performance will soar across the board on account of the Time Inc. spin-off as well as its renewed strategic focus on its TV Networks and TV & Film Production segments. Good times are also up ahead for its TV7Film production segment as upcoming movies "The Great Gatsby" and "The Hangover Part III" are expected to bring in those critical box office numbers. On the television drama front, Warner Brothers has had an optimistic quarter with "Revolution" on NBC as well as the mega hit "Game of Thrones" on HBO, which averages 13.4 million viewers per episode. With regards to networks, under newly appointed Jeff Zucker's leadership, CNN Worldwide is expected to evolve from a respected news broadcasting channel into a broader media outlet that is watched on a regular basis by a wider audience.

Time Inc. spin-off

Time Warner's trademark business, Time Magazine, is due to be spun-off later this year and will then function onwards as an independent, publicly traded company. The move to spin off Time emerged from talks between Time Warner and Meredith Corporation (NYSE:MDP) to create a company with a magazine business as its basis; however, this deal failed to materialize. Time Warner then decided to spin off its publishing unit into a separate entity following poor performance over the last few years. The decision should aid Time Warner strategically as it tries to increase its focus on its profitable TV networks and Film & TV production segments. This decision will also aid shareholders of Time Warner as it has in the past when Time Warner divested Time Warner Cable Inc. (TWC) and AOL Inc. (NYSE:AOL) successfully into independent entities. TWX shares understandably soared following the decision indicating that the market participants view this division as one that has stalled the overall growth of the company.

Time Magazine's operating income has consistently fallen over the past five years, and analysts expect this downward trend to continue as the magazine industry continues to struggle owing to increased advertising costs and lower subscription levels in an increasingly digital world. Time Inc. continues to be the largest magazine publisher in the U.S. and has a solid portfolio of titles; however, revenue at Time Inc., which publishes Time as well as People, Sports Illustrated and In Style, dropped by 5% to $737 million. Even its own analysts expect the magazine to have dull prospects. Moreover, Time Inc. cut 6% of its worldwide staff in the first quarter, amounting to $53 million in restructuring and severance costs.

Segment-wise results 1Q 2013

  1. Revenue from Time Warner's Networks segment, which includesTurner Broadcasting and HBO, increased by 3% to $3,695 million, boosted by the 5% increase in subscription revenue due to a rise in domestic rates, with overall growth being observed from the strength of HBO viewership and its international presence. The segment posted an adjusted operating income of $1,288 million, an increase of 7% owing to a rise in the flat programming rates. Revenue from advertising also improved due to growth witnessed at Turner's domestic entertainment networks on account of rise in pricing.
  2. Revenue from the Film and TV Entertainment business (Warner Brothers) declined overall by 4% at $2,681 million, owing to a lesser number of theatrical performances being showcased and reduced revenue levels from TV licensing. Both its movies for the quarter, "Gangster Squad" and "Jack the Giant Slayer" tanked at the box office. The segment posted an adjusted operating income of $265 million, a 23% increase on a QoQ basis primarily owing to sales from the movie "The Hobbit: An Unexpected Journey."
  3. Revenue from Time Warner's publishing business declined by 5% at $737 million owing to a decline in its subscription revenue to the tune of 11%. This segment posted an adjusted operating income of $39 million with operating losses (adjusted) of $9 million.

Other key financial pointers

  1. Capital expenditures to the tune of $85 million were incurred during this time which brought in free cash flow worth $935 million.
  2. During the first quarter, Time Warner bought back around 16 million shares amounting to $868 million as part of it $4 billion share repurchase program that was announced in Jan 2013.
  3. At the end of the quarter, cash and cash equivalents stood at $2,493 million along with long-term debts worth $19,125 million and shareholders' equity of $29,991 million.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TWX over the next 72 hours.

Business relationship disclosure: Black Coral Research, Inc. is a team of writers who provide unique perspective to help inspire investors. This article was written Sinduja Venkat, one of our Analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Black Coral Research, Inc. is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.