Time Warner: Q2 Results + Hulu News -- Pivotal Research

Time Warner reported 2Q16 results today Results were generally weak as expected for the current quarter with a 5 companywide revenue decline and EPS growth of 4 aided by a 5 reduction in shares outstanding However these results were better than consensus expectations and guidance for the full year was raised slightly with adjusted EPS guidance improved to a range of 535 545At Turner 11 growth in subscription revenues and a 6 gain in advertising led to 6 segmentlevel revenue expansion Absolute profits were stable as margins declined Domestic affiliate fees were up by 15 despite declining subscriber figures given higher pricing for the company39s cable networks Domestic advertising was higher than the global total with high single digit growth supported by both CNN39s ratings and NCAA basketball games At HBO subscription revenues were up by 6 while content revenues were down by 17 for total segmentlevel growth of 2 Margins were also down from 353 to 328 in the yearago period The studio was the weakest division this quarter with revenue down by 19 led by 14 declines on the theatrical side mitigated by televisionrelated declines of 8 Adjusted operating income margins for the segment were lighter in 2Q16 at 82 vs 104 in the year ago periodAmong the elements incorporated into our model39s third quarter expectations management noted expectations that the Turner networks would run fewer hours of original programming in part to mitigate the impact of competition from the Olympics total advertising growth is consequently expected to decelerate rising by low single digits However subscription revenue growth should remain elevated HBO revenue growth should improve slightly in the quarter although programming costs at HBO are expected to rise notably as well Meanwhile the studio should probably grow in the third quarter although profitability may not change significantly yearoveryearThe more significant news from the earnings call related to discussion around OTT content distribution especially including the announcement that Time Warner will take a 10 stake in Hulu and participate in the upcoming launch of its virtual MVPD service We are mindful that Turner39s domestic networks are presently experiencing tangible subscriber declines losing around 2 of subscribers annually at this point in time primarily due to cordshaving Making networks available to alternative distributors such as Hulu probably encourages cordshaving and the rise of skinny bundles but the widening ways in which consumers are able to access Turner39s networks probably also helps ensure the longterm viability of the overall businessPost these results and incorporating minor updates to our model we are maintaining our valuation on Time Warner shares at 96 on a YE2016 basis We continue to rate the stock BuyVALUATION We value TWX with a DCF using a 45 nearterm discount rate 109 longterm and longterm growth of 45RISKS to Time Warner include the hitdriven nature of television programming perceptions around the quotdeathquot of TV advertising and risks around slowdowns in the pay TV businessFULL REPORT INCLUDING RISKS AND DISCLOSURES CAN BE FOUND HERE TWX 8316pdfThe opinions and points of view expressed in this commentary are exclusively the views of the author and do not necessarily represent the views of MediaVillagecom MyersBizNet Inc management or associated bloggers

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Time Warner: Q2 Results + Hulu News -- Pivotal Research

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Brian Wieser

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