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July 29, 2009

Good Quarter at Time Warner Goes Unrewarded

Time Warner reported a good 3Q09, beating expectations on most key metrics. EPS of 45 cents exceeded the consensus estimate of 37 cents. Revenues of $6.81 billion fell slightly short of consensus for $6.97. EBITDA was down just 2%, far ahead of expectations for a drop of 11-14%.

The upside came in Networks and Filmed Entertainment which are the core businesses of the slimmed down Time Warner. Networks upside came in margins as EBITDA grew 14% against an as expected 5% gain in revenues. Tight expense management including only a modest increase in programming costs drove the EBITDA gain. Total advertising in Networks fell 3%, a little better than expected. TNT and TBS appear to have had positive advertising growth offset by negative growth at CNN which is lacking Presidential election related advertising this year.

Filmed Entertainment reported 34% EBITDA growth against expectations ranging to 20% declines once again revealing the hopeless nature of modeling film studio profitability. The upside came form the phenomenal success of The Hangover, lower than expected print and advertising expenses, a $40 million favorable reversal related to home video catalogue sales, and ongoing cost reduction initiatives. Warner Brothers seems to have taken major strides toward more consistent film profitability a la Disney and News Corporation.

Publishing and AOL were both down over 20% in revenues with EBITDA declines of 46% and 23%, respectively. About the only good thing that can be said regarding these segments is that year over year declines are stabilizing. AOL also had a better than expected margin performance.

Similar to Viacom yesterday, TWX shares initially bounced higher on the good results but then gave back the gains. The combination of these two reports suggests a stabilized but not yet improving ad environment. On 1Q calls, stating that the worst was over for advertising was good enough to power the stocks. Now that the stocks have rallied sharply, investors need improvement not stability. As a result, we are getting sellers even as numbers and commentary are good and constructive. Basically, as noted in the preview, the bar was set very high leaving near-term trading skewed toward sell the news.

Next up is Disney after the close on Thursday. I expect more of the same although investors tend to follow Disney's lead more so than the other major entertainment companies.

Posted by Steve Birenberg at July 29, 2009 12:51 PM in TWX