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Time Warner Reports Lower Earnings in Q4

Time Warner reported lower fourth quarter net income as programming expenses rose at Turner Broadcasting and HBO, offsetting a strong performance at the movies.

Net income dropped 12% to $983 million, or $1.09 a share, from $1.112 billion, or $1.18 a share, a year ago. Adjusted earnings per share rose 1% to $1.18 because of fewer shares outstanding. Revenue rose 5% to $8.6 billion in the quarter.

The quarter, which capped a record setting financial year for Time Warner, exceeded Wall Street expectations for some metrics, but fell short for some of the company’s television businesses, notably domestic advertising.

The company said the board raised the quarterly dividend by 10% and authorized a new $5 billion share repurchase program.

“We had another very successful year in 2013, with Turner, Home Box Office and Warner Bros. all posting record profits while also investing for future growth," said Time Warner CEO Jeff Bewkes (pictured) in a statement.

“We also remain on track for the separation of Time Inc. into an independent publicly-traded company during the second quarter of 2014. And our plans to consolidate our New York City area operations into a single new location reflect our unrelenting focus on increased efficiency and collaboration,” Bewkes said.

For 2014, the company said it expects adjusted diluted income per common share from continuing operations excluding Time Inc. to grow by low double digits compared to $3.51 per share in 2013.

This quarter, Time Warner began reporting Turner and HBO’s results separately. They had been combined into a networks division.

Turner’s adjusted operating income fell 3% to $879 million in the quarter. The company said programming expenses grew 12% because of higher impairment charges for programming that did work and woun’t be aired again, plus increased investment in original programming, including programming at the domestic news networks.

“At Turner, we're significantly increasing our investments in programming, particularly in originals to keep our networks at the very top of the industry,” Bewkes said on the company’s earnings conference call with analysts.

Revenues at Turner rose 3% to $2.5 billion. Ad revenues rose 1%, with growth at the domestic entertainment networks offset by declines at the domestic news networks, which faced comparisons to last year’s election season. Domestic ad revenues were flat. There was mid-single digit growth at the entertainment and kids networks, but domestic news was down by double digits because of the comparison to last year’s presidential election and “ongoing softness in the news advertising marketplace,” said Howard Averill, exec VP and CFO of Time Warner.

Averill said that Turner expects advertising to grow in the mid- to high-single digits in the first quarter. “Scatter pricing is up high single to low double digits over the upfront,” he said. The company is seeing strong demand from categories including packaged goods, fast food, and auto. Demand for sports programming is also good. But low ratings could be a drag on the company’s performance.  “At CNN, the comparisons do get easier in the first quarter, but we are still seeing relatively soft demand,” he added.

In the first and second quarter, ad revenue will be boosted by March Madness Elite Eight and Final Four games, but those gains will be more than offset by higher expenses, Averill said.  Sports will be pushing up Turner’s programming expenses, with higher NCAA Basketball expenses kicking in, a new Major League Baseball package starting and higher costs for the NBA, assuming that relationship is renewed.

Subscriber revenues were up 6%. “Since, we last reported earnings, we've signed three additional top 10 U.S. distributors to long-term affiliate agreements,” said Bewkes. That gives Turner new deals with seven of the top 10 distributors, including two fo the top five. “All these deals have been consistent with our expectation that Turner will average double-digit growth in domestic subscription revenue over the next three years,” Bewkes said. “You will start to see the impact of many of those deals in the first quarter and given our progress to-date, we now have even more confidence in that multiyear outlook.”

HBO’s fourth-quarter adjusted operating income fell 4% to $414 million because of higher expenses including a 12% jump in programming costs, and the consolidation of HBO Asia and HBO Nordic.

Revenues rose 6% at HBO in the quarter to $1.3 billion, with sub revenue up 8% while content revenue dropped 9%.

Bewkes said that HBO and Cinemax added almost 2 million domestic subscribers in 2013, though a majority of those subscribers were non-revenue generating. HBO and Cinemax now have more than 43 million domestic subs, he said, and the company is investing in original programming for Cinemax. “We think Cinemax is an underappreciated asset,” Bewkes said. “And we think the Cinemax investment program is a pretty good leverage point for revenue growth at Cinemax and at HBO.”

Warner Bros.’ TV licensing revenue was down in the quarter compared to a year ago, when The Mentalist was sold off-network. Film revenue rose with box office receipts for The Hobbit: The Desolation of Smaug, Gravity and Man of Steel topping $5 billion globally.