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Time Warner Inc. posted second-quarter 2014 earnings of 98 cents a share that surpassed the Zacks Consensus Estimate of 84 cents and increased 29% from the prior-year quarter earnings of 76 cents, reflecting strength across Turner and Home Box Office (HBO). The company's investments in video content and technology continued to show results.

 

Including one-time items, quarterly earnings came in at 95 cents a share, up from 81 cents earned in the year-ago quarter. However, this Zacks Rank #3 (Hold) stock continues to expect low teens growth in earnings per share for 2014.

Time Warner's total revenue of $6,788 million jumped 3% year over year but fell short of the Zacks Consensus Estimate of $6,965 million.

Despite top and bottom-line growth, shares of this media and entertainment company plunged roughly 13% in pre-market trading hours. Lower-than-expected revenue generation and withdrawal of the takeover bid by Rupert Murdoch’s Twenty-First Century Fox, Inc. might have kept investors wary on the stock.

In a strategic move to unlock the value of its core business activities, Time Warner spun off its magazine division into a separate, publicly traded company, Time Inc. (TIME). Time Warner had earlier divested Time Warner Cable Inc. and AOL Inc. into independent companies. The company now concentrates purely on television networks and film and TV production businesses.

Adjusted operating income increased 17% to reach $1,618 million, whereas adjusted operating margin expanded 30 basis points to 24%.

Segment Details

Turner division's revenue rose 5% to $2,750 million, driven by growth of 8% in subscription revenue and 1% in advertising revenue. Adjusted operating income for the segment grew 15% to $940 million attributable to a rise in revenue.

Higher subscription revenue was primarily attributed to rise in domestic rates and international growth, partly offset by an adverse impact of foreign currency fluctuation. Advertising revenue improved on growth witnessed at Turner's domestic and international entertainment networks on account of a rise in pricing, partly offset by adverse foreign currency fluctuation.

Time Warner's HBO segment revenue grew 17% to $1,417 million driven by growth of 10% in subscription revenue and 56% in Content revenue. Higher subscription revenue was primarily attributed to a rise in domestic rates and the merger of HBO Asia and HBO Nordic. On the other hand, Content revenue increased on account of licensing of select programming to Amazon Prime Instant Video.

Adjusted operating income for the division jumped 23% to $552 million mainly on the back of a rise in revenue, partially offset by an increase in programming costs.

Warner Bros. revenue declined 2% to $2,870 million resulting from sluggish theatrical performance in the quarter under review versus the year-ago theatrical slate, comprising Man of Steel, The Hangover Part III and The Great Gatsby, partly offset by rise in home entertainment revenue due to the timing of the release of The Hobbit: The Desolation of Smaug, the sturdy performance of The LEGO Movie and increased license fees from television production.

Adjusted operating income for the division surged 28% to $236 million on home entertainment and television contributions, decline in restructuring expenses and reversal of bad debt reserves, but was partially offset by sluggish theatrical performances.

Other Financial Aspects

Time Warner ended the quarter with cash and cash equivalents of $4,480 million, long-term debt of $22,395 million and shareholders' equity of $25,907 million.

During the quarter, Time Warner incurred capital expenditures of $114 million and generated free cash flow of $256 million. From Jan 1 through Aug 1, the company bought back about 51 million shares, aggregating approximately $3.5 billion. The company's board had authorized a share repurchase program of $5 billion in June. As of Aug 1, the company still had $6.5 billion remaining at its disposal.

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