TWX TIME WARNER INC
Sector financial performance:
This company, which primarily produces content/programing including entertainment, sports, news, kids, TV series, and films, and distributes by paid TV, theatrical, physical media, and digital channels, has been grouped into content maker – news, sports, and drama& film sector in video &audio goods and service industry.
Generally, companies in this sector have experienced weak demand, especially from cable subscribers, for their channels. However, some of major channels providers seem to still be able to raise contractual rate to offset the declining subscribers. We have also seen companies to benefit from increased affiliates fees paid for their channels’ broadcasting and retransmission.
It seems that advertising revenue presents a downturning trend for most of companies in this sector and revenue from licensing their film and TV series content presents a similar trend as well.
The leaving subscribers of paid TV channels caused intensive competition among companies in this sector for programming sources (for examples, sports events), which may be the reason behind increasing programming costs. At the same time, while increasing contractual rates help offset the impacts of lower number of subscribers these impacts eventually hurt profitability of those companies that heavily depend on subscription of paid TV as indicated by decreased cash flow (EBI) in 2018. The impacts seem to be minor for companies that more depend on affiliate fees from broadcasting because of increased affiliate fees and re-transmission as indicated by increased cash flow in 2018.
Typical gross margin seems to be declining since 2016, which present an about 37% gross margin in 2018. With the SG&A as percentage of 16%, we see the operating margin is about 22% down from about 24% in 2016.
It seems that demand for some paid channels (drama and film) of this company has been strong and growing as indicated by increasing subscribers and increased rates charged for those channels in the past several years. However, demand for other paid channels (general news and sports) of this company seems to be declining as indicated by declining subscribers for those channels while rising contractual rates. Revenue from advertising seems to rebound in 2018. Revenue from films production has decreased probably due to unfavourable climate in theatrical industry.
The first quarter of fiscal 2018 compared with 2017(ended Mar 31, 2018)
Net revenue increased 3% attributable to increase of 8-10% in subscriptions of paid channels, driven by increase in rates offset by decrease in subscribers for entertainment, news, and sports channels and driven by increase in both rates and subscribers for drama& film channels, and as well increase in advertising revenue offset by decrease in theatrical products.
Fiscal 2017 compared with fiscal 2016
Net revenue increased 7% attributable to increase of 10-12% in subscription of paid channels, driven by increase in rates offset by decrease in subscribers for entertainment, news, and sports channels and driven by increase in both rates and subscribers for drama& film channels, and increase in theatrical products offset by decrease in advertising.
Fiscal 2016 compared with fiscal 2015
Net revenue increased 4% attributable to increase of 5-13% in subscriptions of paid channels, driven by increase in rates offset by decrease in subscribers for entertainment, news, and sports channels and driven by increase in rates for drama& film channels, and increase of 3% in advertising revenue and increase in theatrical products.
Its gross margin has been at around 42% since 2015 fluctuated with changes in content production costs and programming costs. This company’s SG&A as percentage of sales was basically flat at 17% and we have seen flat operating margin (about 25%).
Currently this company has an enterprise price/EBI ratio of about 20(12 month trailing) or 22(forward based on first quarter performance). We think it may be fairly valued compared with its peers and its performance in future may lie on subscription of digital platform for its news and sport content.
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