TWX Time Warner Inc. New

By Keach Hagey and Lisa Beilfuss 

Time Warner Inc. offered an upbeat forecast for the year after topping earnings expectation in the fourth quarter, largely thanks to lower tax costs.

But operationally, the picture was more mixed, as adjusted operating income dropped at each of its three divisions: Turner Broadcasting, HBO and Warner Bros.

Like the other media companies that have reported earnings so far this season, Time Warner generally beat analysts' expectations for its advertising performance but came up short when it came to subscription revenue for its cable networks that include TBS, CNN and truTV. That slowdown stoked investors' concerns about the long-term strength of the affiliate fee revenue from TV networks that has long powered major media companies' business.

However, unlike its peers, Time Warner was able to forecast a significant uptick in affiliate fee revenue growth at Turner and subscriber growth at HBO, helping to stem the kind of stock selloff that sent Viacom Inc. and Disney shares tumbling after they reported earnings Tuesday.

Time Warner shares were down 2.3% in early afternoon trading.

Some signs of weakness in the pay-TV bundle did take a toll on Time Warner's earnings for the December quarter. Subscription growth at Turner was just 1%, coming in below analysts' expectations, because of the impact of foreign currency fluctuations at its international channels. Domestically, higher pricing was partially offset by lower subscriber numbers at its channels.

But Turner predicted that subscriber revenue would accelerate to "low teens" percentage growth starting in the first quarter of this year, now that it has achieved the rate increases it was targeting at all of its biggest distributors, the company said.

HBO also saw some signs of weaker-than-expected growth, with subscriber revenue rising 3% in the fourth quarter. That fell short of 4% growth analysts expected and marked a sequential slowdown from the previous quarter, in part because of lower international revenues, which were hurt by currency fluctuations.

HBO Now, the broadband-only offering launched last spring, contributed meaningfully to subscriber growth, though not quite at the level that some analysts had been estimating. Over the past year, HBO added 2.7 million subscribers, 800,000 of them through HBO Now, HBO Chief Executive Richard Plepler told analysts on the call.

But, like at Turner, HBO offered bold predictions for the future, promising more aggressive marketing of the HBO Now product as more mobile-friendly new content like the daily "Vice" news show, Jon Stewart and Bill Simmons come online. More important for its bottom line, HBO said it has affiliate deals coming up for renewal toward the end of this year and into the next that will let it renegotiate agreements that currently allow many of its subscribers to be "nonrevenue generating," originally designed as incentives for pay-TV operators to market HBO subscriptions.

"As we move into 2016, we expect the revenue contributions of HBO Now to increase further as we roll out new programming and expand distribution, " said Time Warner Chief Financial Officer Howard Averill to analysts on the call. "And later in the year, we expect to begin renewing some of our affiliate deals, which should result in improved monetization of our subscriber base."

He predicted that "over the next couple years" HBO subscription revenue growth would be by a percentage in the "high-single-digits."

Strength in HBO--which includes programs like "Game of Thrones" and "True Detective"--helped offset weakness in Time Warner's film segment. HBO revenue rose 5.5% to $1.41 billion, while Warner Bros. revenue tumbled a worse-than-expected 15% amid a dearth of blockbusters. In the Turner business, increased advertising and the airing of Major League Baseball playoffs helped revenue edge 2.1% higher.

The company attributed the stronger-than-expected 5% increase in advertising revenues to a strong ad market and higher ratings. It said ad pricing in the so-called scatter market--where ads are sold closer to the time of airing--was up double digits compared with the annual "upfront" ad sales season when commercial inventory is sold well in advance.

Overall revenue declined 5.9% from a year earlier to $7.08 billion. Lower expenses, though, countered the effect of lower revenue and pushed earnings up 19% from the year-ago quarter.

Restructuring costs fell sharply from a year earlier and the company managed to push overhead costs lower by 16%.

In all for the quarter, Time Warner reported profit of $857 million, or $1.06 a share, up from $718 million, or 84 cents, a year earlier. Analysts surveyed by Thomson Reuters had projected $1.01 in adjusted profit per share on $7.53 billion in revenue.

Analysts generally attributed the company's earnings beat to a low tax rate. In the latest quarter, Time Warner's income-tax provision was $280 million, versus $381 million a year earlier on operating profit that was roughly flat.

For the year, Time Warner said it expects to earn an adjusted $5.30 to $5.40 a share, above the $5.26 analysts were projecting and up from its earlier prediction of $5.25 a share.

The media giant also raised its quarterly dividend 15% to $1.61 a share and said its board approved $5 billion in additional share repurchases.

In a nod to the chatter swirling around Wall Street that Time Warner, whose stock is down 25% over the past year, might be under pressure to break up the company to make it more attractive to potential buyers, Time Warner Chief Executive Jeff Bewkes signaled he saw no benefit in spinning out HBO or any other part of the business.

"The combined scale of our businesses is critical to our ability to take advantage of that growth and it is particularly important in distribution and programming, the core of what we do as a company," he said on the call.

Write to Lisa Beilfuss at lisa.beilfuss@wsj.com

(END) Dow Jones Newswires

February 10, 2016 15:15 ET (20:15 GMT)

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