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2/7/2013 6:29:49 PM
Time Warner ( TWX ) grew both its advertising and subscription revenues at a healthy rate in Q4 2012 and outshined peers such as Viacom ( VIAB ) and Disney ( DIS ). 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 year.
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.
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 and Dallas. ((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.