Time Warner Q2 Earnings Preview: Cable Networks And Movie Business In Focus

| About: Time Warner (TWX)

Time Warner (NYSE:TWX) will report its Q2 2013 earnings on Aug. 7. We expect its cable networks, especially TBS and TNT, to drive quarterly growth on improved ratings. The success of TV series such as "Game of Thrones" will boost HBO's subscriber growth in international markets. CNN's ratings have bounced back in the quarter ending June 30 due to the network's focus on new programming and special telecasts.

That's good news given that cable networks constitute more than 75% of Time Warner's value. Additionally, we expect the movie business to do well given the success of "Man of Steel," "The Great Gatsby," and "The Hangover Part III."

Cable Networks to Drive Growth

According to our estimates, TNT U.S. contributes close to 16% to Time Warner's value. TNT has won the title of basic cable's top network in prime time among key adult demographics for Q2 2013. TNT also ranked as basic cable's top network in prime time with adults 18-49 and adults 25-54 for June. In addition, TNT and TBS were at the top among adults 18-49 in prime time for the quarter. The network's "Rizzoli & Isles" ranked as basic cable's top series for the summer.

CNN, the company's news network, witnessed a surge in ratings in the latest quarter ended June 2013. In terms of total viewership, the network was up by equal measures in both total day and prime time, while in the key demo of 25-54 its viewership jumped 77%. We believe the earlier decline in the network's ratings was due to a lack of opinion-based programming, which the network appears to be addressing now by featuring special shows and new programming (see also "CNN Finally Sees A Surge In Ratings And Claims Second Spot After Fox News").

HBO charges subscriber fee for the content it provides. The monthly fee per HBO U.S. subscriber has increased over the years to about $7.67 in 2012. We believe this is because most pay-TV service providers enter into multi-year agreements with content owners such as Time Warner with prescribed yearly increases. We expect the growth in fee per HBO U.S. subscriber to continue as the network continues to bring in more original programming. The third season of "Game of Thrones" has set many records. The latest gross numbers indicate average viewership of 13.6 million, an increase of 2 million from last season, and this makes the series HBO's most watched since the 2004 season of "The Sopranos." HBO has approximately 114 million subscribers globally. The network is also producing multiple original series, including newcomers "Girls" and "Newsroom," as well as certified hits such as "True Blood," "Boardwalk Empire," and "Game of Thrones."

Movie Studio to Perform Well

Earlier in Q1 2013, revenues from the filmed entertainment segment witnessed a 4% decline. However, in the second quarter, the studio performed well at the box office and this should be reflected in the upcoming results. The studio's feature "Man of Steel" has grossed $644 million at the box-office so far. With regard to other movies, "The Great Gatsby" grossed $330 million and "The Hangover Part III" grossed $350 million at the global box office. This quarter has been good, and it will be interesting to see how the audience reacts to the lineup for rest of the year, which includes "The Hobbit: The Desolation of Smaug," "Seventh Son," "Gravity," and "Prisoners." The studio's horror feature "The Conjuring," which was released on July 19, has already crossed $137 million at the box office.

Our current price estimate for Time Warner stands at $62, roughly in line with the current market price.

Disclosure: No positions.