Time Warner Earnings Up 57% in Third Quarter

UPDATED: Sports costs cut cable network profits

By Jon Lafayette -- Broadcasting & Cable, 11/2/2011 8:59:07 AM

Time Warner reported higher earnings thanks to Harry Potter and expects to finish the year stronger than it previously forecast. But the company's stock slid because of lower earnings and slowing ad sales growth at its cable networks.

Third quarter net income rose 57% to $822 million, or 78 cents a share, compared to $522 million, or 46 cents a share, exceeding analyst expectations.

Revenues rose 11% to $7.1 billion, which the company said was its highest growth rate since the third quarter of 2007.

Time Warner raised its business outlook for the full year, saying that it expected earnings per share to grow to be in the high teens. Last quarter, it said it expected growth to be at least in the low teens for 2011.

"Our results demonstrate the success of Time Warner's focus on investing in great content that audiences love and leading the evolution of how it's delivered," said CEO Jeff Bewkes.

Time Warner's networks division, which includes Turner Broadcasting and HBO, reported operating income of $1.09 billion, down 4% from $1.14 billion a year ago. The company blamed higher programming and marketing costs, including higher sports programming costs.

Revenues rose 7% to $3.2 billion from $3 billion. Subscription revenues were up 6%, or $112 million. Advertising revenues were up 9% or $74 million.

CFO John Martin said during the company's earnings conference call with analysts that TW's domestic entertainment cable networks, including kids and young adults, grew advertising by mid-single digits and that domestic news grew ad revenues by high single digits. "That reflected strong ratings momentum at CNN and Adult Swim and, as expected, softer rating at TNT and TBS," Martin said.

"Looking ahead to the fourth quarter Turner is seeing similar advertising trends as it did in the third quarter," Martin said, adding that the cancellation of NBA games should reduce growth by 200 to 300 basis points in the quarter. A basis point is 1/100 of a percentage point.

"Now for planning purposes, we're assuming here that there will be no NBA games in the fourth quarter," Martin said. "And while that would have the negative impact that I've just said on advertising, there would also be an offsetting reduction in programming expenses, so the impact to adjusted operating income from the lost games in the fourth quarter should be relatively immaterial."

Time Warner stock was down more than 2% in afternoon trading on a day when the overall market and most media stock s were up.

"After Q3 was fueled by record film results that helped lift '11 EPS guidance, shares may be overreacting to non-characteristically lackluster Q3 for pivotal Networks unit, said Tuna Amobi, equity analyst at S&P Capital IQ. Amobi is looking ahead to the networks rebounding in the fourth quarter.

Bewkes said that its Warner Bros. TV production unit is off to an excellent start in the new TV season and now has a pipeline filled with shows that should bring in syndication earnings for years to come.

"We have never had so many successful comedies on the air at one time. For all the change in the TV business in the last decade the Holy Grail of TV production is still a hit 30-minute comedy," he said. "Not only do successful comedies set substantial prices and syndication, they can run for multiple cycles and become multibillion dollar annuities. We've got four of the top seven on all of television."

Bewkes also noted that, with CBS, it had made a deal licensing show from their CW venture to Netflix and Hulu. He called Netflix pact a long term deal. "It's worth hundreds of millions of dollars of revenue to Warner Bros. TV and its pretty high margin. In the fourth quarter, we expect to recognize a little more than $100 million in revenue with operating income over half of that. If you're thinking about next year, I would say the recognition is probably similar in terms of order of magnitude."

Operating income for the company's Filmed Entertainment division rose 153%, thanks mainly to the performance of Harry Potter and the Deathly Hallows: Part 2 and The Hangover Part II.