Time Warner (TWX): Solid Q3, "Looking at Everything"

SAI’s TWX earnings analysis is brought to you by Panther CDN, where companies are getting great performance and saving money by switching from prior generation CDNs like Limelight and Akamai.

Time Warner Q3 Release
SAI Research AOL Key Metrics Spreadsheet

Overall: Quarter solid.  Better news than previous quarters.  AOL still struggling, especially in display ad revenue, but cost cuts, a rebound in search, and a slowdown in paid subscriber attrition should allow EBITDA growth next year.  Some of this weakness attributed to weak ad demand.  New CEO Jeff Bewkes wouldn’t comment on “structure of company” at end of 2008, but safe to assume an IAC-like disintegration is one possibility.  Old CEO Dick Parsons gracious, self-deprecating, and charming, as always.

Key Points

  • Revenue and EBITDA growth solid, especially in light of declines in both at AOL, driven in part by acquisitions at Cable. Filmed Entertainment and Networks also strong. Revenue up 9% to $11.7 billion, slightly above $11.4 billion consensus.  EBITDA up 15%, in line.
  • Free cash flow exceptional at $2.0 billion, up 34% from $1.5 billion last year.
  • 2007 EBITDA guidance “reaffirmed” (i.e., no upside).
  • AOL ad revenue up 13%, a continued deceleration from last quarter’s 16% and just shy of the 15% expected.  US revenue ex-TAC was up only 9%.  Display revenue downright weak: up 6%.  Partner revenue up 21% (but don’t forget that this is much lower margin, thus the slower growth ex-TAC).  Subscription revenue actually came in ahead of expectations, and the rate of subscriber bleed may be starting to slow.  Some weakness in pageviews and uniques. EBITDA dropped sharply, as expected, which was the reason for the mass layoffs.
  • Cable revenue up 25% (9% organic).  EBITDA up 28%, mostly from acquisitions.  Slightly weaker than expected subs.
  • Film revenue very strong, up 33% to $3.2 billion, on Harry Potter, Ocean’s 13 et al.  EBITDA jumped 71%.
  • Networks (Turner, et al) revenue up 6%, driven by 7% growth in subscriptions and 32% growth in content.  Advertising declined 3% from the sale of WB (Turner was up 10%).  EBITDA up 6%.
  • Publishing revenue flat, EBITDA up 12%.

See Also: AOL: More Firings Coming?
Call Q&A:

SAI’s TWX earnings analysis is brought to you by Panther CDN, where so many companies are getting great performance and saving money by switching from prior generation CDNs like Limelight & Akamai.

AOL: Why expect continued deceleration in Q4?  We expect to see pageviews up in Q4.   There were some bright spots: rebound in search, partner revs up 21%. But display weak.  Continuing to change categories, eliminate dumb stuff.  Also, display weak because of recent trends in ad demand.  We need to do a better job.

Will you buy stuff?  NBC?  Scripps?  Dick: Jeff now in charge, but we always look at everything.  Jeff: We’ll look at lots of stuff.

What will company look like at end of 2008? 
Jeff: Strong mo in divisions.  Focus on increasing strategic advantage.  Not going to telegraph in advance.

AOL: 10Q comment about advertising going away. 
Yes, Apollo…dropping out.  Core operating performance reason for optimism and growth.  We expect to grow earnings at AOL next year (no surprise given 25% cost cut).  Dick: Haven’t played the last card in the cost-cutting deck either (translation: more cuts coming).

AOL:  Registered users going up.  Over 25 million (vs. 18  million paid subs when changed model).  Vast majority of paid drops are keeping and using AOL.  This is why PVs stabilised.
AOL: Display revs up 6% vs. 15% last quarter?  CPM decline?  There is pressure on pricing in online ad world because some movement from premium to targetable/measurable buys.  Having said that, RPMs went up–because we did better dealing with inventory.  We’re getting more focused on how we move premium inventory to performance.  This is a key skill that we are honing.

AOL: Some AOL paid subs using for access.  When do we hit stabilisation?   Hard to answer.   Attrition is flattening [good news].  Most are using broadband and narrowband.  Hard to say how many rely on AOL for access to Internet. Pleased with trends.

AOL: When move inventory from premium to perf, what happens to price?  Depends on inventory.  Try to find most efficient way to use.

AOL: Margins?  Will continue going up.

AOL: Relative margins between display and network ads?: Margins lower on third-party, obviously.  [10-20 cents on dollar].

Cable: Not appropriate for us to discuss now.

AOL: Can platform and properties be broken up?  There is some real strength in the AOL properties.   They work well together, but we will be flexible.  Right now, like position.

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