3Q Gains Followed By 4Q Pain At Time Warner


Time Warner announced strong earnings that exceeded Wall Street forecasts on Wednesday. But the company also warned that things would get tougher in the fourth quarter, with ad revenues slowing and programming expenses increasing.

John Martin, the company’s CFO, told analysts that the company’s Networks group, usually a driver of the company’s earnings, would have flat operating earnings in the fourth quarter.  “We anticipate a pretty big year-over-year ramp into our original programming investment and in related marketing spending, and that’s a result of more than 80% increase in original episodes at Turner as well as an increase in spending on both original series and original films at HBO,” said Martin, who will become CEO of the company’s Turner Broadcasting unit next year.

Martin said the company will also be investing in CNN, whose operating income will finish down for 2013. The investment is “part of a strategic decision to broaden the programming beyond merely breaking news and politics, he said. New shows from Anthony Bourdain and Morgan Spurlock have done well. “Their success suggests that they’re a meaningful opportunities for CNN beyond merely breaking news and politics. Programming investments such as these will likely put some pressure on CNN’s margins in the near term, but they will also open up a new pool of advertisers to CNN and they could position the network for a return to attractive growth over time,” he said.

After posting double digit growth in advertising during the third quarter, despite a slight decline in domestic news, including CNN, Martin said that in the fourth quarter, “scatter pricing at the entertainment networks is up double digits over the upfront, and we anticipate high-single digit advertising growth at domestic entertainment including kids.” He added that domestic news is likely to be down double-digits year-over-year. “That’s because of the comparison against the U.S. Presidential Election last year, as well as ongoing softness in the news advertising marketplace, in general,” he said. Ad growth will also slow in the international front.

Analysts were fairly sanguine about the fourth quarter developments.

“Given Time Warner’s unchanged full-year guidance, both the basic math and management commentary confirm that all the upside from the 3Q beat will come out of 4Q forecasts,” Michael Nathanson of MoffettNathanson, said in a research note. “CFO John Martin’s last earnings call was a clearly articulated and honest look forward at 4Q’s timing of Cable Network programming expenses and tougher comparisons at Film,” he said. Nathanson added that “CME losses, which only seem to worsen with each passing quarter, remain an area of concern and will reduce full year EPS by about $0.10. ” While advertising benefited from comparisons to last year’s quarter which included the Olympics, “management guided to mid-single digit 4Q advertising growth, with high single digits domestically,” Nathanson said.

Marci Ryvicker of Wells Fargo added that the “good news is that domestic ad trends look solid at the important entertainment nets — and while international ad is decelerating, a large portion is attributed to [foreign exchange].” But Ryvicker said “the bad news is, even though the top-line trends are ok, Q4 is expected to take a hit from investments in originals at Turner (80% more episodes) and new programming at CNN.”

She concluded that “although Q4 Networks operating income should be flat year over year, we view these investments in a positive light, as they should drive solid growth down the road.”

During the call, CEO Jeff Bewkes also endorsed Time Warner’s continuing support of the CW, a joint venture with CBS.

“If you put the economics together of our show production and the network, it’s a pretty valuable generator of asset value and income, even current income,” Bewkes said. So it’s a good platform for the company, and it’s been a significant part of our talent relations to create a working relationship with some of the younger talents that makes a lot of the cutting edge programming that goes not just to the CW, but it goes from Warner series production into the five broadcast nets and increasingly, into the cable networks who are buying more. And as you know, we not only supply TNT, TBS, TruTV, we also have some critical shows in a lot of the other cable networks. So it’s all, to our mind, it’s been a very successful venture.”