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February 03, 2009

Time Warner 4Q08 Earnings Preview

Time Warner effectively preannounced 4Q08 results when it updated its guidance for 2008 last month. The guidance brought 2008 EBITDA to a gain of just 1% but several items were legitimately one-time so the headlines off the guidance update were more negative than management intended. Underlying growth in 2008 is probably closer to 3% which is a pretty good compared to peers and the very troubled markets for advertising and DVD sales.

I think trends at the segment level for 4Q08 are widely understood. Cable Systems will be positive but slowing as subscriber growth is under pressure even in growth areas like broadband, digital TV, and telephone. Filmed Entertainment had a good quarter thanks to The Dark Knight but faces tough comps. Cable Networks have held up well with ad growth still in positive territory. AOL is really struggling as display advertising especially at portals is under pressure. Publishing is also weak with national advertising at magazines finally succumbing to broader advertising pressures.

There will be two areas of major focus on the conference call: an update on the split with Time Warner Cable (TWC) and 2009 guidance....

....The TWC split is expected to close in 1Q09. TWX will give up all ownership of TWC in return for $9.3 billion in cash and offloading of corporate debt. Timely closing of this transaction is important to any bull case for TWX shares.

The split also has major implications for guidance. While TWC is capital intensive it produces a lot of free cash flow and is very recession resilient. I think 2009 expectations for TWC growth are too high but revenue, EBITDA, and free cash flow should all be in positive territory.

Excluding TWC, new TWX becomes a pure play content company. Advertising exposure rises considerably. Investors already expect a bad year for AOL and Publishing so the focus will be on Filmed Entertainment and Cable Networks. Positive year-over-year growth in revenue and EBITDA in these segments would support the idea that TWX is best positioned among the major entertainment to weather the recession. Cable Networks are especially important as this is the only true growth business within TWX's asset base.

As a TWX bull with a long position, I would like to hear that trends at the cable networks have advertising holding in positive territory. If I hear that and the TWC split is on time I think the shares are higher. If not, my thesis on TWX is in trouble.

Posted by Steve Birenberg at February 3, 2009 09:33 AM in TWX