Time Warner (
) grew both its advertising and subscription revenues at a healthy
rate in Q4 2012 and outshined peers such as Viacom (
) and Disney (
). As we expected, TBS and TNT remained strong, and there was some
improvement in CNN's ratings driven by the coverage of U.S.
presidential elections. In addition to this, Time Warner saw HBO
expand in international markets and raised its digital licensing
fee. As we enter 2013, we expect substantially more original
programming on TNT and TBS, higher revenue from streaming deals and
an increased focus on international expansion. Under the new
leadership, Time Warner expects CNN to do much better in the new
The essence of earnings that Time Warner's cable networks are
performing fundamentally well, and the emphasis on original
programming and the expansion of HBO will drive future growth.
Revenue growth picked up towards the end of 2012, and margins have
improved due to higher ad pricing, increase in subscription fees
and growth in digital video licensing revenues.
See our complete analysis for Time Warner
How Are CNN, TBS And TNT Doing?
As expected, CNN saw some improvement in its ratings in the
fourth quarter driven by the coverage of U.S. presidential
elections. However, for the full year 2012, its performance
was dismal as CNN lagged after Fox and MSNBC and suffered a
significant decline in ratings. But the company expects that
the news network will do better under the new leadership. CNN has
also introduced a live streaming app that will help it tap into the
broader trend of higher Internet and mobile device usage. Long
term, the company needs to improve the rest of its programming,
apart from breaking news.
We estimate that CNN's U.S. operations constitute close to
10% to Time Warner's value.
In 2012, TBS was the top performing ad-supported cable network
in prime time in 18-34 demographic and ranked third in 18-49
demographic. The prime time ratings have seen a significant growth,
thanks to the success of syndicated series such as
The Big Bang Theory
and a general improvement in demand for comedy. TNT is also
performing well with its shows such as
Major Crimes, Perception
((Time Warner's Q3 2012 SEC filings)) The network ended the year
with fourth ranking in prime time in the 18-49 demographic and
claimed five of the top 10 original series for the year 2012.
One thing that we are likely to see for channels such as TBS and
TNT is more original programming in 2013. Time Warner's intentions
are to refresh the prime time lineup of its networks over a
multi-year period. For that to happen, the company needs to keep
investing in original programming and slowly phase it in. In 2013,
Time Warner is going to increase the number of original series on
TNT and TBS by 40%.
We estimate that TNT and TBS constitute roughly 25% of Time
Warner's value just from their U.S. operations alone.
HBO As A Growth Engine
HBO continues to enjoy growth driven by quality programming,
rate increases and subscriber growth. The network is still a clear
market leader when it comes to showing blockbuster TV shows and new
movies. The international subscriber growth has been stellar. HBO
and Cinemax have 73 million subscribers, 35% more than the 2011
count. Given that the network saw 30% growth in Q3, it appears that
the subscriber gains are actually accelerating. In addition to
this, HBO has seen good response to its HBO Go app, which has
increased the viewer activity by a substantial amount.
We estimate that HBO contributes more than 20% to Time Warner's
value from its U.S. business alone.
If we account for its international operations as well, HBO is by
far the most critical business that Time Warner owns, and the
company will continue to push HBO's international expansion.
Recently, it launched new HBO premium services in Netherlands and
Nordic countries and plans to launch its first premium service in
India. Emerging countries are likely to embrace premium programming
slowly, and being able to tap into this opportunity in early stages
is going to be important.
Our price estimate for Time Warner stands at $58
, implying a premium of about 20% to the market price.
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