Time Warner Beats, Profit Falls

Time Warner Inc.(TWX - Analyst Report), the diversified media conglomerate, posted second-quarter 2012 earnings of 59 cents a share that beat the Zacks Consensus Estimate by a penny but dropped 1.7% from 60 cents earned in the prior-year quarter due to dismal performance across Film and TV Entertainment and Publishing segments, partially offset by strength witnessed across Networks and television production businesses.

On a reported basis, including one-time items, quarterly earnings came in at 44 cents a share down 25.4% from 59 cents in the year-ago quarter.

However, Time Warner reiterated its low double-digit growth rate expectation for fiscal 2012 earnings per share. The current Zacks Consensus Estimate for fiscal 2012 is $3.21 per share, reflecting a growth of approximately 11% from fiscal 2011.

Time Warner’s total revenue in the quarter slipped 4% to $6,744 million from the prior year-quarter attributable to revenue declines across Film and TV Entertainment and Publishing units, partially offset by growth witnessed in Networks segment. The reported revenue also fell short of the Zacks Consensus Estimate of $6,958 million.

Adjusted operating income declined 5% to reach $1,213 million, whereas operating margin came in at 18% compared with 18.2% in the prior-year quarter.

Segment Details

Networksdivision’s revenue, which includes Turner Broadcasting and HBO, rose 4% to $3,598 million, driven by an increase of 6% in subscription revenue and a jump of 2% in advertising revenue, partially offset by a decline of 5% registered in content revenue. Adjusted operating income for the segment increased 9% to $1,121 million attributable to growth in revenue, partially offset by higher expenses, including increased programming costs.

Time Warner’sFilm and TV Entertainmentsegment revenue dipped 8% to $2,614 million due strong releases in the year-ago quarter, which included theatrical release of The Hangover Part II, the home entertainment release of Harry Potter and the Deathly Hallows: Part 1, and the videogame releases of Mortal Kombat 9 and LEGO Pirates of the Caribbean: The Video Game.

However, increased television licensing revenue in the quarter helped in mitigating the decline to some extent. Adjusted operating income for the division, which comprises Warner Brothers, plunged 16% to $137 million due to a fall in revenue.

Publishingrevenue fell 9% to $858 million reflecting a 7% decline in advertising revenue due to a fall in domestic magazine advertising revenue, and an 11% drop in subscription revenue on account of reduced newsstand revenue globally and decreased domestic subscription sales. Adjusted operating income plummeted 43% to $97 million from the prior-year quarter, principally due to lower domestic revenue.

Other Financial Aspects

Time Warner ended the quarter with cash and cash equivalents of $2,470 million, long-term debt of $19,421 million, reflecting a debt-to-capitalization ratio of approximately 39.7%, and shareholders’ equity of $29,443 million.

During the quarter, Time Warner incurred capital expenditures of $150 million and generated free cash flow of $202 million.

From January 1, 2012 through July 27, 2012, Time Warner bought back 40 million shares, aggregating $1.5 billion. The company’s board of directors had authorized a share buyback plan of $4 billion in January 2012.

Recommendation

Currently, we have a long-term Neutral recommendation on the stock. Moreover, Time Warner, which competes withNews Corporation(NWSA - Analyst Report) andWalt Disney Company(DIS - Analyst Report), holds a Zacks #3 Rank, which translates into a short-term Hold rating, and correlates with our long-term view.