This summary is based on the third quarter fiscal 2008 earnings call conducted by Time Warner Inc. (TWX) on November 5, 2008.
Management:
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Vice President, Investor Relations: Doug Shapiro
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President, Chief Executive Officer, Director: Jeffrey L. Bewkes
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Chief Financial Officer, Executive Vice President: John K. Martin, Jr.
Key Investors Issues
- Revenues were up marginally to $11.71 billion.
- Earnings were $1.1 billion or 30 cents a share flat relative to the prior year.
Third Quarter Highlights
Revenues were up marginally to $11.71 billion from $11.68 billion in the prior year reflecting 5% growth in subscriptions and a small decline in advertising.
- The subscription revenues were impacted by a decline in AOL’s access business.
- Networks, AOL and film all posted significant margin expansion.
- Earnings were $1.1 billion or 30 cents a share flat relative to the prior year despite the growth in adjusted OIBDA, lower interest expense, and a smaller, outstanding share count due to the buy-back program.
Time Warner delivered over $2 billion in free cash, which represented a very high, 59% conversion rate.
- The firm ended the quarter with just over $33.5 billion in net debt; that’s down about $2 billion year-to-date, as free cash flow has been partially off set by investments, acquisitions and dividends.
- On a consolidated basis, the firm had $18 billion of cash and availability, with over $5 billion at Time Warner.
Segment Highlights:
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AOL revenues decreased 17% ($207 million) to $1.0 billion, due to a 26% decline ($165 million) in Subscription revenues and a 6% decrease ($33 million) in Advertising revenues.
- The decline in subscription revenues reflects mainly a decrease in domestic AOL brand subscribers, related primarily to AOL’s strategy to offer its e-mail and other products free of charge to Internet consumers.
- Driving the decrease in Advertising revenues were declines in display advertising on AOL Network sites and sales of advertising on third-party Internet sites, offset partially by an increase in paid-search advertising.
Adjusted Operating Income declined 7% to $398 million, resulting from lower revenues and higher traffic acquisition costs, offset partly by lower personnel and overhead costs as well as reduced marketing, network and other expenses.
- Operating Income decreased 9% ($27 million) to $268 million, due primarily to lower adjusted operating income before depreciation and amortization.
- AOL had 110 million average monthly domestic unique visitors and 54 billion domestic page views, according to comScore Media Metrix, which translates into 165 average monthly domestic page views per unique visitor.
- As of September 30, 2008, the AOL service had 7.5 million U.S. access subscribers, a decline of 2.6 million from the year-ago quarter, reflecting subscriber losses due partially to AOL’s strategy to prioritize its advertising business.
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Cable revenues increased 8% to $4.3 billion as subscription revenues grew 9% to $4.1 billion.
- Video revenues rose 4% to $2.6 billion, driven by continued growth in digital video services and video price increases.
- High-speed data revenues increased 12% to $1.1 billion, as a result of continued high-speed data subscriber growth.
- Voice revenues were up 37% to $421 million, reflecting growth in Digital Phone subscribers and advertising revenues grew 1% to $224 million.
Operating income rose 9% to $1.6 billion, benefiting from revenue growth, offset partially by higher employee, video programming and voice costs.
- Employee costs grew, resulting primarily from headcount and salary increases.
- Video programming expenses rose 8% to $949 million, due to contractual rate increases and a higher percentage of basic video subscribers who also subscribe to expanded tiers of video services.
- Voice costs climbed 25%, reflecting primarily growth in Digital Phone subscribers.
- Revenue generating units (“RGUs”) totaled 34.2 million, reflecting net additions of 522,000.
- Customer relationships were 14.7 million, and Triple play subscribers approached 3.0 million (or 20% of total customer relationships), benefiting from 168,000 net additions during the third quarter.
Filmed Entertainment revenues declined 9% to $2.9 billion, as the standout theatrical performance of The Dark Knight and the home video release of Sex and the City: The Movie faced difficult comparisons to the prior year.
- Another driver of the decrease was lower television licensing fees, due mainly to the prior year quarter’s initial off-network availability of Two and a Half Men and Cold Case.
- These declines were offset partially by growth in interactive video games, due primarily to LEGO Indiana Jones and LEGO Batman.
Networks revenues climbed 7% to $2.7 billion, with growth of 10% in Subscription revenues and 9% in Advertising revenues, offset partially by a 17% decline ($46 million) in Content revenues.
- Subscription revenues benefited mainly from higher rates at both Turner and HBO and, to a lesser extent, more subscribers for Turner’s networks, as well as the impact of international expansion.
- Driving the increase in Advertising revenues were Turner’s domestic networks, reflecting largely higher CPMs (advertising rates per thousand viewers).
The decrease in Content revenues was due to lower ancillary sales of HBO’s original programming, as well as lower syndication revenues associated with HBO’s Everybody Loves Raymond.
- Adjusted operating income grew 21% to $1.0 billion, fueled largely by increased revenues and lower programming expenses, offset in part by higher marketing and election-related newsgathering expenses.
- Programming expenses declined 4% to $854 million, due primarily to lower original programming costs at HBO and Turner and a decrease in sports programming costs at Turner.
- This was offset partially by higher programming costs associated with international expansion and higher licensed programming costs at both HBO and Turner.
Publishing revenues decreased 7% to $1.1 billion, due to declines of 8% in Advertising revenues, 18% in Other revenues and 1% in Subscription revenues.
- The decrease in Advertising revenues reflected lower domestic print magazine revenues, offset in part by higher online revenues ($13 million), led by SI.com, People.com and CNNMoney.com.
- Other revenues decreased, due to lower sales at Synapse, Southern Living At Home and Oxmoor House, offset partly by the impact of the acquisition of QSP, Inc. in August 2008.
- Adjusted operating income declined 19% to $241 million, due primarily to the decreases in domestic print magazine Advertising revenues and Other revenues, offset partially by lower overhead expenses.
Brand Performance:
- CNN.com was the leading news source on the web as ranked by Unique Visitors and CNN Keynote coverage of the Democratic Convention was the number one across all of television.
- The scale of entertainment networks, TNT and TBS, allowed the firm to invest in the highest quality original and syndicated acquired content.
- TBS now claims four of the five sitcoms on cable, including the number original comedy on cable, Tyler Perry''s House of Pain.
