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The Times At Time Warner

Posted on Thursday, Feb 5th 2009

Continuing our coverage of media & entertainment results, here is a quick analysis of Time Warner’s (NYSE: TWX) Q4 results, which were announced yesterday. Like Disney, Time Warner reported earnings much lower than the Street’s expectations and despite some bright spots (CNN, HBO), the outlook for many of the company’s divisions is bleak as the recession continues.

Q4 revenues of $12.3 billion were 3% short of the previous year’s revenues of $12.6 billion. The market was expecting flat revenue growth for the quarter. EPS stood at $0.23 against the market’s expectations of $0.26 and fell 21% over the year.

For fiscal 2008, Time Warner reported revenues of $47 billion compared to $46.5 billion the previous year. EPS of $0.99 grew 3% over the year.

During the quarter, AOL revenue dropped 23% to $0.97 billion, primarily led by a 27% drop in subscription revenues. Ad sales from AOL also reported a drop of 18%. Time Warner is still indecisive on AOL’s fate. Last week Google requested to exercise special rights on its 5% stake in AOL. In its recent quarterly results, Google announced a $726 million hit on account of the AOL acquisition. TWX incurred a $24.2 billion writedown on its cable, publishing and AOL units in the current quarter.

Time Warner’s publishing division reported a 13% drop in revenue, with ad sales down 20% over the year. The revenue drop was in spite of Time Inc.’s readership growing 4% over the year compared with the industry’s growth of 1%.

The company is reallocating resources towards production of high-quality branded content. Like Disney, they seem to be facing the secular trend of user selection. However, their new-release hit DVD sales have been holding up very well. The company did note that home video sales were down in the fourth quarter.

Time Warner’s brand continues to be its strength, as was evident from the various records the company’s divisions set during the year. CNN set record coverage of the US political campaigns across all media: TV, online (where it teamed with Facebook) and mobile. HBO won more Golden Globes than any other network provider and Warner Bros. finished #1 at the box office worldwide with a record $1.8 billion in domestic ticket sales. They finished #1 in home video, both for new releases and catalog, for the eighth consecutive year.

Like so many companies across a range of sectors, Time is looking at optimizing costs and recently announced an outsourcing initiative that will reduce nearly 800 jobs, i.e. 10% of its workforce.

Management has three main goals for the coming year. First, the ability to make high returns on organic investments. Second, a strong balance sheet to support the businesses and provide access to capital markets at attractive rates, regardless of the environment. They are looking to reduce their long-term target leverage ratio to 2.5 times OIBTDA from 3 at present. Finally, they want to return value to shareholders through dividends and share repurchases.

The stock is currently trading around $9.20 with a market cap of $33.8 billion after having recovered from a record low of $7.00 in November. Here’s our analysis of Web 3.0 and Time Warner.

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