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April 29, 2009

Time Warner: Good Results and AOL Exit Drive Upside

Time Warner (TWX) reported better than expected 1Q09 results. Headline financial numbers of 35 cents, $6.95 billion in revenue, and $1.56 billion in EBITDA each exceeded estimates. On its own, the financial performance would have been enough to push the stock higher. However, news that an AOL spin has moved to the front burner added fell and led the stock up 4%.

I still like TWX but near-term catalysts are mostly played out. An AOL spin is likely incorporated in the stock now and while the 2009 outlook is slightly improved, the current quarter is going to be the most difficult of the year. A clean beat to 2Q estimates in July is next prominent catalyst followed by a resumption of share buyback activity. The message on timing o the AOL spin was muddled but I think it will be a few months based on the repurchase of the Google stake, the requirement for an independent valuation, and the need for Board approval. I suspect the share repurchase announcement will coincide with the AOL spin. This news seems likely to come around the time of the 2Q report.

The bottom line is that the restructured TWX looks like a stronger entity than previously expected due to tighter management of costs and a somewhat improved revenue outlook for the cable networks and filmed entertainment segments. Upside to the upper-$20s later this year is plausible but following a 21% pop since the split from Time Warner Cable (TWC), further near-term gains may be difficult.

Getting back to the quarter, the upside came from better than expected revenue and margins at Filmed Entertainment and higher than expected margins at Networks. Costs saving and TV production drove Filmed Entertainment. Networks outperformed the industry with a 2% advertising decline though I had hoped for a bit better. 2Q advertising is trending to a mid single decline. This is a good performance in a tough environment but also a little worse than I hoped for.

Publishing and AOL struggled mightily as expected. AOL revues fell by 23% with a 37% decline in EBITDA. Publishing revenues dropped 23% with profitability collapsing by 92%. AOL ad revenue fell over 20% and Publishing dropped 30%. AOL should produce similar performance in the next few quarters while Publishing is likely to improve margin due to seasonality.

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

Posted by Steve Birenberg at April 29, 2009 12:49 PM in TWX