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February 05, 2007

Time Warner 4Q06 Good Enough

Time Warner (TWX) reported 4Q06 results that were very close to analyst estimates across the board. There don't appear to be any surprises in the overall results or at the segment level. On first glance, it appears that AOL and Cable performed at least well as expected, possibly with a little upside.

TWX also provided guidance for 2007. If I am interpreting the language correctly it looks like operating EPS are expected at 90 cents. This figure is below analyst estimates that average $1.01. TWX provided EBITDA guidance of mid to high teens growth off a 2007 base of $11.1 billion. This equates to $12.8-$13.1 billion which is also a little below what I found in a review of three or four analyst models. Please note that the mid to high teens growth is not pro forma for the acquisition of Adelphia. Pro forma EBITDA growth will be closer to 10%. TWX trades off EBITDA not EPS so the EPS guidance shortfall is not meaningful. On EBITDA, I suspect that the guidance could be conservative but TWX management does not have a history of announcing guidance that everyone knows they will beat. That could be changing as the company is coming out its long period of restructuring. Then again, maybe not. Management did indicate that 1Q07 had a tough comparison which is the sort of comment that can be read as indicating they are being conservative with guidance.

As outlined in my preview, a sell the news reaction is possible given the great performance of TWX shares over the past six months. If my initial reaction that 2007 guidance is slightly less than analyst estimates proves correct, a moderate decline in the shares could be in the cards for today. However, there is nothing here that should change anyone's mind so if the shares did sell off I would expect any decline to be modest and would not read anything into it.

Here is a close look at the segments which is where the action is for TWX....

AOL: Advertising growth remained healthy at +49%. AOL is easily outperforming Yahoo. I still wonder whether this growth is sustainable as page views at AOL are still declining. I also worry that the quality of current page views is poor as new free AOL subscribers may or may or not stick with the service. Subscriber losses were 2 million which is less than expected but management indicated they still expect the same number o paying subscribers to quit.

Cable: Results at TWX's most important division were good. The only blemish was loss of 52,000 basic subscribers at acquired Adelphia systems, primarily in Dallas and LA. TWX should be able to fix this relatively quickly with better customer service and more aggressive triple play marketing. Revenue and EBITDA growth continues to be firmly in the low to mid teens range. Subscriber additions for high speed data, digital TV, and VOIP Telephony were as expected.

Filmed Entertainment: Results were slightly worse than very poor expectations but this is a notoriously volatile and difficult to model segment. Investors are looking ahead to 2007 where easy comparisons, a good movie slate, and improved DVD sales off of successful 4Q06 should lead to a big rebound.

Cable Networks: Rpeorted results had revenue up 10% and EBITDA up 12%. Jessica Reif of Merrill Lynch asked a good question about pro forma results given that Court TV and SPorano's syndication were included in the quarter. HSe wonder what core growth was. I remain concerned that this division is moderating to mid single digit long-term growth. If so, it has negative implications for valuation as this the second largest EBITDA producer at TWX.

Publishing: Boring. Revenues -1%, EBITDA -3%. This divison represented just 14% of EBITDA in the quarter. It will be drag on corporate growth but its small and shrinking contribution should not have any investment impact.

Posted by Steve Birenberg at February 5, 2007 08:10 AM in TWX