« May 2006 Model Signals | Main | Clear Channel: Better Quarter Will Help Short-Term »

May 03, 2006

Another Mixed Quarter For Time Warner

Time Warner (TWX) reported mixed results. The headline numbers looked real good but after adjustments it was just another quarter of mediocre growth with flat revenues and mid-single digit EBITDA growth. Free cash flow continues strong and the share buyback has been very aggressive, both of which provide near-term support for the shares and add to the long-term upside. However, without a pickup in the corporate growth rate for revenue and operating cash flow, I don’t see a lot of upside in TWX shares.

After adjustments TWX reported 20 cents in EPS, matching consensus and a penny ahead of some recently lowered estimates. Revenues were actually light at $10.5 billion vs. consensus of $10.9 billion. EBITDA matched estimates after adjusting downward for several beneficial one-time items. Management reaffirmed guidance for high single digit EBITDA growth and 35-45% free cash flow conversion of EBITDA. I care mostly about segment level trends so here is a brief recap.

AOL had much worse than expected subscriber losses in the US and Europe but advertising growth was better than expected leaving revenues in line with expectations. AOL.com advertising sales strategies seem be gaining some traction but I don’t see how they hold up with the drain of page views as more dial-up subs go bye-bye. Further, AOL.com is at best #3 in online advertising, not a position investors will pay for. Management was mum on subscriber data for the broadband initiative but seeing as dial-up sub losses accelerated and every cable company reported better than expected high speed data subscriber additions, I don’t see how AOL could be gaining an unusually large number of subs....

Cable revenue and subscriber trends looked great. Revenue was up a better than expected 15% and every subscriber estimate was easily exceeded. However, after adjustments, EBITDA rose 12% indicating some margin contraction. I didn’t think a clear explanation was provided. Management referenced higher sub adds equaling greater costs but that explanation won’t be greeted well by investors concerned about competition with AT&T (T) and Verizon (VZ). Comcast (CMCSA/K) could feel a little pressure today on this news.

Filmed Entertainment fell short on revenue but still met EBITDA estimates. This might indicate that cost cutting at the studio is underway as promised.

Networks continues to show decelerated growth form a few years ago with revenue up just 3% and EBITDA up 8%. This is an important business at TWX in terms of size and valuation. I remain concerned that analysts are placing too high a multiple on this business because the industry is maturing. This is especially true for non-niche networks like those owned by TWX.

Publishing is TWX's smallest business but it still fell meaningful short of estimates with enough of a shortfall to impact the corporate figures. Magazines are having a tough year throughout the industry. I have long-term concerns about growth as the internet can easily attack magazine ad budgets.

One other topic of interest on the call was Dick Parsons' comments on Unvision (UVN). He basically dias "no comment" but I took his comments to mean that if management felt the return on a UVN acquisition met their hurdle rates it was oemthing that could get done.

I still have to update my spreadsheet. Depsite the mixed quarter I think my 2006 target may rise slightly due to the accelerate share repurchase. Nevertheless, I'll stay on the sidelines at TWX as I prefer Disney, Comcast, NTL, Regal Entertainment, and Central European Media Enterprises in the media sectors. Each has superior near-term growth relative to TWX.

Posted by Steve Birenberg at May 3, 2006 12:04 PM in TWX