Time Warner (TWX) Beats On Q3 Earnings, Ups Outlook

Time Warner Inc. (NYSE:TWX) , which recently accepted the buyout offer of AT&T, Inc. (NYSE:T) , posted third-quarter 2016 adjusted earnings of $1.83 per share that surpassed the Zacks Consensus Estimate of $1.36, and surged significantly from $1.25 reported in the prior-year period. The company's investments in video content and technology continued to show results. Share repurchase activity and lower effective tax rate also provided cushion to the bottom line. Better-than-expected results prompted management to raise its earnings projection.

Management now envisions adjusted earnings per share for 2016 between $5.73 and $5.83, including the net tax benefit of 28 cents. However, excluding the same, adjusted earnings would be in the band of $5.45-$5.55 per share. The company had earlier projected adjusted earnings per share in the range of $5.35–$5.45. The current Zacks Consensus Estimate for 2016 is $5.42, which is likely to witness an upward revision in the coming days.

Including one-time items, earnings per share from continuing operations came in at $1.87 per share, up from $1.26 reported in the prior year quarter.

Time Warner's total revenue of $7,167 million increased 9% year over year on account of growth witnessed across Home Box Office (“HBO”), Warner Bros. and Turner. Foreign currency headwinds hurt total revenue by $55 million. Total revenue also came in ahead of the Zacks Consensus Estimate of $7,001 million.

Adjusted operating income came in at $2,070 million, up 12% from the year-ago quarter, whereas adjusted operating margin expanded 80 basis points to 28.9%.

Time Warner has taken restructuring aggressively. The company is now focusing on original programming, containing costs and increasing investments in key areas to enhance profitability.

Segment Details

Turner division's revenue rose 9% to $2,610 million due to 2% growth in advertising revenue, 12% increase in subscription revenue, and 33% surge in Content and other revenue. Higher advertising revenue reflected growth at Turner’s domestic news business, which was partly offset by reduced delivery at certain domestic entertainment networks. International advertising remained flat with local currency growth offset by the impact of foreign exchange rates. Subscription revenue grew on account of a rise in domestic rates and growth at Turner’s international networks, partly offset by foreign currency headwinds and fall in domestic subscribers. The increase in Content and other revenue was attributable to higher international licensing revenues.

Adjusted operating income for the segment increased 12% to $1,203 million compared with the year-ago quarter.

Time Warner's HBO segment revenue climbed 4% to $1,426 million driven by growth of 5% in subscription revenue, partly offset by 2% decline in content and other revenue. Higher subscription revenue was primarily attributed to a rise in domestic rates and international growth. On the other hand, content and other revenue decreased due to a fall in domestic licensing revenue, partly offset by increase in international licensing revenue.

Adjusted operating income for the division rose 2% to $530 million as higher expenses were offset by revenue growth. Programming costs increased 15% during the quarter.

Warner Bros. revenue grew 7% to $3,402 million due to increase in theatrical revenue partly offset by fall in videogames revenue. Theatrical revenue gained from the box office releases of Suicide Squad, The Legend of Tarzan, Sully and Lights Out. Videogames revenue fell due to the comparison to the launch of LEGO Dimensions and carryover revenue from Mortal Kombat X in the year-ago period.

Adjusted operating income for the division jumped 12% to $433 million.

TIME WARNER INC Price and EPS Surprise

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Other Financial Aspects

Time Warner ended the quarter with cash and equivalents of $2,308 million, long-term debt of $24,419 million and shareholders' equity of $24,278 million, excluding non-controlling interest of $1 million.

During the quarter, Time Warner incurred capital expenditures of $108 million and generated free cash flow of $1,481 million. From Jan 1, 2016 through Oct 21, 2016, the company bought back about 31 million shares, aggregating approximately $2.3 billion.

Zacks Rank

Time Warner carries a Zacks Rank #3 (Hold). Better-ranked stocks in the space include Nexstar Broadcasting Group, Inc. (NYSE:T) , sporting a Zacks Rank #1 (Strong Buy) and Sirius XM Holdings Inc. (NASDAQ:SIRI) , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Nexstar Broadcasting Group has a long-term earnings growth rate of 6.5%.

Sirius XM Holdings has a long-term earnings growth rate of 24.5%.

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