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Why Is Time Warner (TWX) Down 2% Since the Last Earnings Report?

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More than a month has gone by since the last earnings report for Time Warner Inc. (TWX - Free Report) . Shares have lost about 2% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Time Warner Q2 Earnings Beat Estimates, Revenues Miss

Time Warner Inc., which accepted the buyout offer of AT&T, Inc., posted second-quarter 2017 adjusted earnings of $1.33 per share that surpassed the Zacks Consensus Estimate of $1.19 and rose 3% from the prior-year period on the back of top-line growth and lower interest expense.

Including one-time items, earnings per share from continuing operations came in at $1.34 per share, up significantly from $1.20 reported in the prior year quarter.

Time Warner's total revenue of $7,330 million increased 5% year over year on account of growth witnessed across Home Box Office (“HBO”), Warner Bros. and Turner. However, total revenue marginally fell short of the Zacks Consensus Estimate of $7,340 million.

Adjusted operating income came in at $1,755 million, down 0.3% from the year-ago quarter, whereas adjusted operating margin contracted 140 basis points to 23.9%. Management continues to project adjusted operating income growth in the high single digits for the full year.

Time Warner has taken restructuring aggressively. The company is now focusing on original programming, containing costs and increasing investments in key areas to enhance profitability. The company's investments in video content and technology continued to show results. The company witnessed robust subscription revenue growth at Home Box Office and Turner. Warner Bros. benefited from the success of Wonder Woman.

Recently, the company has struck a deal with Snap to attract more young audience and increase advertising revenues. Per the deal, Time Warner will create and produce 10 original shows annually over the next two years. Time Warner will make variety of shows like scripted dramas, documentaries and comedies. Following the deal, the number of shows on Snapchat will increase to three per day from one by the end of 2017. Moreover, with the return of Game of Thrones and considering the hype, anticipation and popularity surrounding the show, season seven is all set to be another successful one for HBO.

Segment Details

Turner division's revenue rose 3% to $3,102 million on account of 13% increase in subscription revenue partly offset by 8% fall in Content and other revenue and 6% decline in advertising revenue. Subscription revenue grew due to rise in domestic rates and growth at Turner’s international networks, partly offset by fall in domestic subscribers. Advertising revenue was hurt due to not airing of the NCAA Division I Men’s Basketball National Championship and Final Four games and airing of two fewer NBA playoff games this quarter.

Management anticipates subscription revenue in the second half of 2017 to grow at an equivalent rate as in the first half of 2017. Total advertising revenue is expected to decrease in the low single-digits in the third quarter.

Adjusted operating income for the segment declined 9% to $1,030 million compared with the year-ago quarter.

Time Warner's HBO segment revenue inched up 1% to $1,476 million driven by growth of 8% in subscription revenue, partly offset by 44% fall in Content and other revenue. Higher subscription revenue was primarily attributed to a rise in domestic rates and subscribers, and international growth. The decline in Content and other revenue reflects fall in home entertainment and licensing revenues.

Management expects Home Box Office’s subscription revenue growth rate to rise in the second half of 2017 relative to the quarter under review and total revenue is projected to increase at a higher rate in the second half of 2017 compared to the first half.

Adjusted operating income for the division surged 14% to $546 million.

Warner Bros. revenue jumped 12% to $2,988 million on account of rise in theatrical and videogames revenues, partly offset by fall in television revenues. Theatrical revenue increased due to the box office release of Wonder Woman and rise in home entertainment revenue was mainly attributable to the release of The LEGO Batman Movie and carryover from Fantastic Beasts and Where to Find Them. Videogames revenue gained from an increase in the number and favorable mix of releases in the current year period, including Injustice 2. Television revenue decreased due to fall in initial telecast revenues.

Adjusted operating income for the division soared 20% to $261 million. Due to the theatrical release of Justice League and the videogame release of Middle-earth: Shadow of War in the fourth quarter, operating income growth in the second half of 2017 is more likely to be skewed to the final quarter.

Other Financial Aspects

Time Warner ended the quarter with cash and equivalents of $1,705 million, long-term debt of $21,843 million and shareholders' equity of $25,987 million, excluding non-controlling interest of $2 million. During the quarter, the company incurred capital expenditures of $104 million and generated free cash flow of $891 million.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimate. There has been one revision lower for the current quarter.

Time Warner Inc. Price and Consensus

 

Time Warner Inc. Price and Consensus | Time Warner Inc. Quote

VGM Scores

At this time, Time Warner's stock has a subpar Growth Score of D, however its Momentum is doing a lot better with a B. Following the exact same course, the stock was allocated also a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks' style scores indicate that the company's stock is suitable for value and momentum investors.

Outlook

While estimates have been broadly trending downward for the stock, the magnitude of these revisions has been net zero. Notably, the stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.




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