Time Warner Reports Higher 2Q Earnings

Turner ad revenue up 11%

By Jon Lafayette -- Broadcasting & Cable, 8/3/2011 8:50:22 AM

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Time Warner reported higher than expected earnings in the second quarter as its cable networks reported strong advertising growth. And the company said it expected earnings to accelerate through the rest of the year.

Net income for the quarter was $638 million, or 59 cents a share, up from $562 million, or 49 cents a share, a year ago.

Revenues rose 10% to $7 billion, which the company said was its highest growth rate since the third quarter of 2007. Ad revenues were up 8%, including an 11% gain at Turner Broadcasting.

Analysts were expecting a profit of 56 cents on revenue of $6.81 billion

"We had another successful quarter and remain on track to meet our financial goals for the year," Jeff Bewkes, chairman and CEO said in a statement.

Bewkes added that the company was making progress shaping its business models to benefit from the transition to a digital media environment. "We also have bought back $2.3 billion of our shares so far this year, reflecting our confidence in our competitive position and growth prospects and our dedication to providing attractive shareholder returns," he said.

During the company's earnings conference call with analysts, Bewkes said that the company's big cable networks, TNT and TBS, drew viewers well thanks to sports and original shows. But he noted that some of the off-net shows then networks had acquired weren't performing as expected.

"We aren't satisfied with the recent ratings on some of our acquired content on TBS and TNT. That's something we are very focused on and plan to fix," Bewkes said.

"We are confident that our plans to add some of the biggest hits on TV would boost viewership, shows like The Big Bang Theory," which joins the TBS lineup at the end of the third quarter.

TNT will be stripping The Mentalist next year and the network has recently made deals to add Castle and Hawaii Five-0.

"Keep in mind that even one successful show can have a significant impact of these networks and we think we have several in the pipeline," Bewkes said. "As a result, we expect these moves will improve ratings starting with TBS in the fourth quarter."

The issues highlight that in the current media environment with viewers having more choice about what to watch, the difference between hit shows and mediocre ones is becoming more profound. "Hit shows and big brands win, mediocre stuff loses," Bewkes said.

While sports have been driving TNT, Bewkes said getting an NFL package was not necessary for the network. "We don't need an NFL package, but we always look at things and try to figure out, could they be beneficial to the mix of what we're doing, and sports is a pretty important part of the offering at Turner," he told the analysts. "You should assume that we'd only do something as big as a major league if we thought we were going to make money out of it. We don't do these as loss leaders."

Bewkes added that Time Warner hopes the NBA owners and players can get together on a deal for next season, adding "it's a not a long-term issue for us and we have protections built into our contract and would work with our long terms NBA partners on collaborative solutions if"  games were canceled.

The issues over acquires series did not appear to hurt Turner in the upfront. In a strong cable market, Turner performed better than its peers, Bewkes said. "Our large-reach entertainment networks, TNT and TBS, both saw a solid double-digit CPM increases, looking down at the higher end of all of TV, broadcast or of cable"

Bewkes said it was the third time in the past four years that TNT and TBS's price increase outstripped the average of the broadcast networks, which mean the price gap between Turner on cable and broadcast was narrowing.

Bewkes added that Turner's upfront strength extended to truTV and Adult Swim, which saw pricing and volume increases substantially higher than the average for cable networks. "Our news networks also performed extremely well with CNN outpacing its cable news competitors for both CPM and volume growth," he said.

Time Warner's networks group, which includes Turner and HBO, reported that adjusted operating income rose 5% to $1.03 billion in the quarter from $981 million the year before. Programming costs rose 9% because of higher expenses for original and sports programming, notably the NCAA Men's Basketball Tournament. Operating income was also affected by expenses marketing HBO Go.

Revenue for the networks group rose 9% to $3.45 billion from $3.17 billion. Subscription revenues were up 7%, ad revenues were up 11% and content revenues were up 18%.

TV production also had a great quarter, Bewkes said. "At this year's upfront, Warner's placed 27 series on the broadcast schedules, including 16 returning shows and 11 new shows. That places Warner's as the number one producer of TV programming yet again this year."

Time Warner raised its expectations for the full year, projecting that net income per share growth will finish in the low teens from last year's $2.41 a share. "We remain fully on track to meet if not exceed our guidance for the full year," Bewkes said.

John Martin, Time Warner's chief financial and administrative officer, said that they year has progressed more or less as planned. "The first quarter was our most challenging one from a profit growth perspective due to difficult film comparisons and the significant investments we made in the NCAA basketball tournament. In the second quarter, we returned to profit growth and adjusted EPS growth," he said.

Martin said the company expects accelerating growth in profit and earnings per share beginning in the third quarter. "In fact, growth would be even higher if not for the timing of programming and marketing spending in the third quarter at the networks," he said. Time Warner expects programming spending to grow at a mid-teen rate during the quarter. Ad revenues are expected to grow at the same rates as in the second quarter.

In the fourth quarter, "we expect another quarter of very, very strong profit growth," Martin said.

"Growth in programming and marketing will be much more modest in Q4 as compared to the third quarter, but we'll also benefit from this year's very strong upfront, and our expectations for improved programming," he said. "So, we fully anticipate a very strong second half for this year."