« Time Warner 4Q08 Earnings Preview | Main | Both Dreamworks in the News »

February 04, 2009

Time Warner: Relatively Good Earnings But Murky Outlook

Given the circumstances, Time Warner (TWX) reported decent 4Q08 results and provided better than expected guidance. However, to be perfectly honest, there are so many charges and related future cost savings that it is very difficult to tell whether guidance for "about flat" results in 2009 fairly reflects underlying operating trends. I fear that guidance may slightly overstate fundamentals. That said, relative to peers TWX is performing quite well. Even if 2009 operating trends are actually slightly down, which is I think is the reality, the other big cap media conglomerates are looking at operating income declines of at least 10-20%.

TWX benefits from the fact that it has no exposure to local advertising and broadcast television. It has troubled business in AOL and magazine publishing but these are smaller business relative to the cable networks and film studio. Both the larger divisions look like they will enjoy small up years in 2009.

The best piece of news out of the quarter is that the dividend will remain unchanged when the Time Warne Cable split occurs. When TWX goes ex-dividend for the split, the share price should drop by about $2. This means the dividend is effectively increased by over 20%. The new current yield will be will be about 3.5%. Management indicated that the dividend would rise with free cash flow. With tight controls on capital investments I think a dividend increase for 2010 is likely assuming business conditions do not get considerably from today. Management also indicated that it was lowering its long-term target for balance sheet leverage and would be below the target for the foreseeable future. They also talked down acquisitions. This means that share repurchases are likely to resume once economic conditions stabilize.

4Q results at the operating level were in line with recently lowered estimates....

....AOL was poor as expected with an 18% advertising decline. However, sub losses slowed and cost saving kept margins ahead of expectations. Filmed Entertainment also closely matched estimates with strength at HBO and the incredible success of The Dark Knight overcoming weakening DVD sales. Cable Networks enjoyed 7% advertising growth which is remarkable in this environment (Disney reported -6% for ESPN). Adjusting for a litigation charge related to a 2004 event, margins expanded slightly. Publishing was poor with advertising revenues dropping 20%.

Add it all up and adjusted EPS of 23 cents trailed consensus of 26 cents. However, none of the analysts I follow closely were above 24 cents so I think that consensus may be lagging due to the company's guidance reduction in mid-January. Revenues were a little below expectations at $12.3 billion. I was expecting $12.5 billion. Most of the shortfall was at the movie studio where revenue predictability is notoriously low.

4Q08 was only important to TWX shares to the extent it gave clues on the 2009 outlook. Unfortunately, not that much can be gleaned form 4Q08 because anecdotal and actual evidence suggest that key drivers of media companies including advertising and DVD sales decelerated further in January. TWX did indicate that advertising at its cable networks was holding up and remains positive but with limited visibility. Cancellations are low but scatter market activity is also low with pricing up slightly. Publishing and AOL appear to be getting worse. The film studio has a good lineup this year, especially a new Harry Potter film and several promising new tentpoles. Assuming reasonable success for the releases at the box office the film studio should have an up year.

As mentioned restructuring activity is very high as TWX tries to reposition its operating segment against both secular and cyclical challenges. Management was optimistic that permanent cost savings would show up in 2009 offsetting much of the restructuring. This is a big reason why guidance for "about flat" is plausible even as business conditions continue to decelerate.

Posted by Steve Birenberg at February 4, 2009 02:46 PM in TWX