Time Warner Inc (TWX) Earnings Preview: Q3 2013 Results Suffer By Comparison To Robust Q3 2012

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People walk in front of the Time Warner Inc. headquarters building at Columbus Circle in New York
Time Warner's headquarters in New York.

Time Warner Inc. (NYSE:TWX), which owns such prominent media properties as CNN and HBO, is expected to report slightly lower third-quarter profit in comparison to the blockbuster results the U.S. media giant booked in the year-earlier quarter.

Analysts polled by Thomson Reuters expect the New York company, which reports Wednesday, to announce net income of $835.2 million, or 89 cents per share, compared with $838 million, or 86 cents per share, in the year-earlier quarter. Revenue is expected to edge up to $6.94 billion from $6.84 billion.

Results from the July-through-September period will suffer by comparison to those of the 2012 third quarter, which benefited from the strong results of the July 2012 movie "The Dark Knight Rises," Deutsche Bank predicted in a note. A big one-off bump in advertising revenue from last summer's Olympics also boosted last year’s third quarter results.

This summer also had a Time Warner blockbuster, "Man of Steel,” which set a record for opening weekends, but its results were split between the second and third quarters of this year.

The company's profit margin may be squeezed by rising expenses. Television and film production costs are rising with higher pay for actors, writers and other professional crew. Time Warner’s film business, Warner Bros., and Legendary Entertainment poured $180 million into the movie "Pacific Rim," and it brought in only $408 million from box offices globally in the third quarter. By contrast, "The Dark Knight Rises" cost $250 million but brought in nearly $1.1 billion globally. Warner Bros. makes up about 20 percent of the company’s cash flow, and Time Warner’s cable networks make up about 70 percent, according to Morningstar Research.

Furthermore, increases in the cost of sports events and television series could shrink profit margins in the Time Warner cable business. But if Time Warner is able to “mitigate some of the sports rights increases through better operating efficiencies such as back office costs, shared services and common IT platforms,” costs could moderate, Macquarie (USA) Equities Research said in a note.

Revenue is expected to rise for several reasons. Rising network ratings and expansion in the international market are driving better ad sales for Time Warner’s cable networks, which include such widely distributed channels as HBO, CNN, TNT, TBS and others. In the third quarter, viewership increased 15 percent for TBS, 11 percent for Adult Swim, 6 percent for TNT and 9 percent for CNN compared to last year's third quarter. By contrast, CNN’s competitors, MSNBC and Fox News, lost 27 percent and 11 percent of viewership, respectively, in the third quarter compared to last year. CNN, TNT and TBS are staples in basic pay television packages that now reach 100 million subscribers, and the premium HBO channel has more than 29 million subscribers in the U.S., Morningstar said in a note.

Not all revenue streams are growing. Revenue from the Warner Bros. television studio could decline as viewers shift from network television to other entertainment outlets. But the rise in online streaming companies like Netflix is expanding Time Warner’s licensing opportunities to bring in revenue from older content in the midst of declining revenues from DVD sales.

“Warner Bros. is well positioned because we believe quality video content gets paid for despite changes in distribution,” Michael Corty, senior equity analyst at Morningstar Equity Research, wrote in an October report.

Also, Time Inc., Time Warner’s publishing business, will likely continue to suffer as digital content takes a greater share of content generation. Time Warner plans to spin off the magazine publisher in the first quarter of 2014.

Earnings per share are expected to rise on the back of Time Warner's continuing share buybacks.

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