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April 27, 2009

Time Warner Earnings Preview: It's All About Advertising Growth

Time Warner (TWX) reports its first quarter since completion of its restructuring on Wednesday morning. The company no longer owns cable systems and is not a content focused company with greater than 2/3rds of operating income coming from film and TV production and cable networks.

Consensus estimates call for EPS of 38 cents, revenue of $6.8 billion, and EBITDA of $1.51 billion. I am not trustful of the EPS number and I find the revenue number to be above more recent estimate revisions.. The estimate range is quite wide and may not be fully transitioned to the new TWX. Revenue is forecast to decline 9.5% with EBITDA down 17.6%.

The first quarter is going to be the weakest of the year due to tough comps at the Filmed Entertainment segment. 1Q08 had the I Am Legend DVD which sold very well. There is no comparable title this year. AOL and Publishing will be very weak thanks to advertising declines that could be north of 20%.

The one bright spot should be Cable Networks where revenues should rise close to 5% with EBITDA up about 7%. Cable nets benefit from upper single digit growth in affiliate fees and advertising trends are holding in relatively well. The single most important takeaway form the quarter will be 1Q advertising growth for cable nets and commentary about the outlook 2Q and the rest of the year. If TWX can hold cable net advertising growth in positive territory, the stock should continue to be a leader. Any deceleration to negative growth, especially beyond low single digits, will put a quick end to the recent rally in the shares.

The other focus for investors will be trends and potential separation at AOL.

Disclosure: TWX is widely held in by clients of Northlake Capital Management, LLC including Steve Birenberg's personal accounts.

Posted by Steve Birenberg at April 27, 2009 10:07 AM in TWX