Time Warner TWX delivered first-quarter 2018 adjusted earnings of $2.28 per share, which beat the Zacks Consensus Estimate by 52 cents. The figure surged 37.3% year over year.

Total revenues of $7.99 billion increased 3.4% year over year on account of growth witnessed across Home Box Office (“HBO”) and Turner. Total revenues also came ahead of the Zacks Consensus Estimate of $7.95 billion.

Time Warner’s planned takeover by AT&T T in a deal worth $85.4 billion hit roadblock after Department of Justice (DOJ) raised antitrust concerns over the proposed merger. On Nov 20, 2017, the DOJ filed a lawsuit to enjoin the merger. The trial began in the week of Mar 19, and the parties’ presentation of their cases is anticipated to conclude in early May.

Time Warner and AT&T have agreed to extend the termination date of the “Merger Agreement” to Apr 22. The companies have agreed to waive, until Jun 21, 2018, its right to terminate the Merger Agreement based on the deal not being completed by Apr 22, 2018.

Segment Details

Turner revenues (42% of total revenues) increased 8.3% to $3.34 billion on account of 8% increase in subscription revenues, 9% increase in content revenues and 9% increase in advertising revenues.

The increase in subscription revenues reflected higher domestic subscription revenues of $66 million due to higher contractual rates. However, subscriber base declined in the quarter.
 

Time Warner Inc. Price, Consensus and EPS Surprise

Time Warner Inc. Price, Consensus and EPS Surprise | Time Warner Inc. Quote

International subscription revenues increased $59 million primarily due to growth in Latin America. This can primarily be attributed to a new premium pay-television sports offering in Argentina.

Advertising revenues reflected higher domestic revenues of $106 million primarily due to Turner airing the Final Four games of the NCAA Division I Men’s Basketball Championship Tournament on its networks.

HBO revenues (20% of total revenues) increased 3.3% to $1.62 billion driven by growth of 10% in subscription revenue, partly offset by 29% plunge in content and other revenues.

Higher subscription revenues were primarily attributed to a rise in domestic rates and subscribers, and international growth. Lower content and other revenues reflect fall in international licensing revenues.

Warner Bros. (38% of total revenues) revenues declined 3.8% to $3.24 billion on account of fall in theatrical revenues.

Operating Details

Selling, general and administrative (SG&A) expense increased 10.2% from the year-ago quarter to $1.40 billion.

Growth reflects higher AT&T merger costs at all segments, higher marketing expense at the Turner and Home Box Office segments and negative impact of foreign exchange rates at the Warner Bros. segment.

Adjusted operating income came in at $1.98 billion, down 8.2% from the year-ago quarter. Adjusted operating margin contracted 310 basis points to 24.8%.

Turner adjusted operating income declined 5% to $1.13 billion. HBO adjusted operating income fell 10.4% from the year-ago quarter to $535 million. Warner Bros. adjusted operating income plunged 25.2% to $383 million.

Guidance

For 2018, Time Warner projects adjusted operating income to grow in the high-single digit range.

Time Warner expects Turner’s subscription revenues to increase in the mid-single digits year over year. However, Turner’s programming costs and total expenses growth rate are expected to moderate.

For the second quarter, Time Warner projects subscription revenues to grow at a similar rate as for the full year. Management anticipates flat to low-single digit growth for Turner’s total advertising revenues.

Turner’s total expense growth is expected to be in the low-double digits, primarily due to higher sports costs, including costs related to Turner’s rights to air NBA playoff games, and increased original programming expenses. As a result, operating income is anticipated to decline modestly on a year-over-year basis.

HBO subscription revenue growth rate is expected in the low-double digits for the second quarter. HBO’s programming costs are projected to increase in the high teens, primarily reflecting the timing and mix of programming. HBO’s operating Income is anticipated to increase slightly on a year-over-year basis.

Time Warner expects Warner Bros. operating income to increase at double-digits rate, primarily due to higher television licensing of both television and theatrical product.

Zacks Rank & Other Stocks to Consider

Time Warner currently carries a Zacks Rank #2 (Buy). AMC Networks AMCX and Tribune Media TRCO are stocks worth considering in the same sector. Both sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for AMC Networks and Tribune is currently pegged at 7.4% and 2%, respectively.