Time Warner reports Q1 net income down 10.2% year-over-year to US$651M on decrease in filmed entertainment segment; revenue up 6% to US$6.7B reflecting growth in networks segment

Andrew Rogers

NEW YORK , May 4, 2011 (press release) – Time Warner Inc. (NYSE:TWX) today reported financial results for its first quarter ended March 31, 2011.

Chairman and Chief Executive Officer Jeff Bewkes said: “We’re off to a solid start this year. We’re on track to meet our financial goals for 2011 and making a lot of progress toward our longer-term objectives. For instance, our continued investment in the highest-quality content is paying off: the NCAA Men’s Basketball Tournament on TBS, TNT and truTV performed even better than we expected and Game of Thrones debuted on HBO to critical acclaim and strong viewership.”

Mr. Bewkes continued: “We are also very excited about the progress we are making across the company in introducing and expanding our digital offerings to allow consumers to enjoy our content sooner and on more platforms and devices than ever before. Just this past week, we expanded the availability of our HBO GO streaming service to mobile devices; reached agreement with Apple to enable our Time, Fortune and Sports Illustrated print subscribers to access the iPad editions of these magazines at no extra cost; and, through Warner Bros., launched our test of premium video on demand. We’ve also bought back $1.3 billion of our shares so far this year, double the pace of last year. That reflects our confidence in our competitive position and growth prospects and our commitment to continue improving shareholder returns.”

Company Results

In the quarter, Revenues rose 6% from the same period in 2010 to $6.7 billion, reflecting growth at the Networks segment. Adjusted Operating Income declined 10% to $1.3 billion, due to a decrease at the Filmed Entertainment segment. Adjusted Operating Income margins were 19% versus 22% in the 2010 quarter. Operating Income decreased 13% to $1.3 billion, while Operating Income margins were 19% compared to 23% in the prior year first quarter.

In the first quarter, the Company posted Adjusted EPS of $0.58 versus $0.61 for the year-ago quarter. Diluted Income per Common Share was $0.59 for the three months ended March 31, 2011, compared to $0.62 for last year’s first quarter.

For the first three months of 2011, Cash Provided by Operations from Continuing Operations reached $825 million, and Free Cash Flow totaled $693 million. As of March 31, 2011, Net Debt was $13.5 billion, up from $12.9 billion at the end of 2010, due to share repurchases, dividends, as well as investment and acquisition spending, offset by the generation of Free Cash Flow.

Refer to “Use of Non-GAAP Financial Measures” in this release for a discussion of the non-GAAP financial measures used in this release and the reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures.

Stock Repurchase Program Update

In January, the Company’s Board of Directors increased the amount remaining on the Company’s common stock repurchase program to $5.0 billion for purchases beginning January 1, 2011.

From January 1 through April 29, 2011, the Company repurchased approximately 37 million shares of common stock for approximately $1.3 billion.

Presented below is a discussion of the performance of Time Warner’s segments for the first quarter of 2011. Unless otherwise noted, the dollar amounts in parentheses represent year-over-year changes.

NETWORKS (Turner Broadcasting and HBO)

Revenues increased 18% ($538 million) to $3.5 billion, benefitting from growth of 9% ($167 million) in Subscription revenues, 31% ($242 million) in Advertising revenues and 48% ($120 million) in Content revenues. The increase in Subscription revenues resulted mainly from higher domestic rates, as well as international expansion and growth. The growth in Advertising revenues was driven by the NCAA Division I Men’s Basketball Championship events (the “NCAA Tournament”), strong domestic pricing, as well as international expansion. Content revenue growth was due mainly to higher sales of HBO’s original programming, including The Pacific, Sex and the City and Boardwalk Empire.

Adjusted Operating Income grew 2% ($26 million) to $1.2 billion, reflecting higher revenues, partly offset by increased expenses, including higher programming costs. Programming costs rose 37%, due primarily to an increase in sports programming expenses, principally attributable to the NCAA Tournament, as well as higher original and licensed programming costs. Operating Income declined 3% ($39 million) to $1.2 billion. The prior year period included a gain of $59 million that was recognized upon the consolidation of HBO Central Europe, reflecting the excess of the fair value over the Company’s carrying costs of its original investment in HBO Central Europe.

Turner Sports’ and CBS Sports’ exclusive live coverage of the NCAA Tournament across TBS, TNT, truTV and CBS was the most-watched tournament since 2005. In addition, NCAA March Madness on Demand, which provided live and on-demand streaming video across broadband and mobile applications, delivered a 63% increase in total visits over the prior year across all platforms. TNT’s coverage of the NBA 2010-2011 regular season was the most-watched season in Turner’s 27 years of airing NBA coverage. This success has continued with TNT’s coverage of the 2011 NBA playoffs, which have delivered strong double-digit growth in key demographics through April 26, 2011 compared to 2010.

On May 2, 2011, HBO launched HBO GO, its authenticated online video service, on mobile devices including the iPad, iPhone and Android smart phones. With the recent additions of Cox, DirecTV, Dish Network and Suddenlink, HBO GO is now available to approximately 80% of HBO’s domestic subscriber base. Through May 2, 2011, the premiere episode of Game of Thrones had a total of 8.7 million viewers, and initial night viewership has increased since the first episode. HBO earned seven Peabody Awards, the most of any television or news outlet this year, including awards for The Pacific and Temple Grandin.

FILMED ENTERTAINMENT (Warner Bros.)

Revenues decreased 3% ($90 million) to $2.6 billion, due primarily to difficult comparisons against the theatrical and home video release slate in the year-ago period. The prior year quarter included revenue from Sherlock Holmes and The Blind Side, as well as a greater number of home video releases. These declines were partly offset by higher television license fees, benefitting from a greater number of series, timing of deliveries and improved worldwide syndication, as well as higher video games revenues driven by LEGO Star Wars III: The Clone Wars.

Adjusted Operating Income declined 50% ($152 million) to $155 million, as lower theatrical contributions were only partially offset by higher television contributions. Operating Income declined 49% ($149 million) to $158 million.

In March, Warner Bros. Entertainment became the first movie studio to offer consumers the ability to rent films directly through Facebook. Last month, Warner Bros. launched its test of premium VOD by offering Hall Pass through DirecTV.

PUBLISHING (Time Inc.)

Revenues were essentially flat at $798 million, reflecting a decline of 5% ($17 million) in Subscription revenues, offset by an increase of 18% ($13 million) in Other revenues. Advertising revenues were flat in the quarter due to the transfer of management of SI.com and Golf.com to Turner and the sales of certain magazines at IPC (the “IPC Sales”). Together, these transactions negatively affected Advertising revenues by approximately $15 million compared to the prior year quarter. Excluding the impact of the transfer and IPC Sales, Advertising revenues would have increased 4%. The decrease in Subscription revenues was due primarily to lower international revenues, related in part to the IPC Sales, as well as lower domestic subscription and newsstand revenues. The increase in Other revenues was due primarily to a license fee received from Turner related to SI.com and Golf.com.

Operating Income rose 26% ($13 million) to $63 million, reflecting the growth in higher-margin domestic print magazine advertising revenues and lower expenses, partially offset by higher restructuring and severance costs.

During the quarter, Time Inc. maintained its leading share of overall domestic magazine advertising at 21.2% (Publishers Information Bureau data). In January, People.com became the first magazine website to surpass one billion monthly page views. This past week, Time Inc. reached agreement with Apple to provide print subscribers to Time, Fortune and Sports Illustrated with authenticated access to the iPad editions of the magazines at no extra cost – a benefit that People magazine subscribers already enjoy.

CONSOLIDATED NET INCOME AND PER SHARE RESULTS

Adjusted EPS was $0.58 for the three months ended March 31, 2011, compared to $0.61 in last year’s first quarter. The decrease in Adjusted EPS primarily reflected lower Adjusted Operating Income partly offset by fewer shares outstanding.

For the three months ended March 31, 2011, the Company reported Net Income attributable to Time Warner Inc. shareholders of $653 million, or $0.59 per diluted common share. This compares to Net Income attributable to Time Warner Inc. shareholders in 2010’s first quarter of $725 million, or $0.62 per diluted common share.

For the first quarter of 2011, the Company reported Net Income of $651 million, or $0.59 per diluted common share. This compares to Net Income in the prior year quarter of $725 million, or $0.62 per diluted common share.

USE OF NON-GAAP FINANCIAL MEASURES

The Company utilizes Adjusted Operating Income (Loss) and Adjusted Operating Income margin, among other measures, to evaluate the performance of its businesses. Adjusted Operating Income (Loss) is Operating Income (Loss) excluding the impact of noncash impairments of goodwill, intangible and fixed assets; gains and losses on operating assets; external costs related to mergers, acquisitions, or dispositions, as well as contingent consideration related to such transactions, to the extent such costs are expensed; and amounts related to securities litigation and government investigations. Adjusted Operating Income margin is defined as Adjusted Operating Income divided by Revenues. These measures are considered important indicators of the operational strength of the Company’s businesses.

Adjusted Net Income attributable to Time Warner Inc. common shareholders is Net Income attributable to Time Warner Inc. common shareholders excluding noncash impairments of goodwill, intangible and fixed assets and investments; gains and losses on operating assets, liabilities and investments; external costs related to mergers, acquisitions, investments or dispositions, as well as contingent consideration related to such transactions, to the extent such costs are expensed; amounts related to securities litigation and government investigations; and amounts attributable to businesses classified as discontinued operations, as well as the impact of taxes and noncontrolling interests on the above items. Similarly, Adjusted EPS is Diluted Net Income per Common Share attributable to Time Warner Inc. common shareholders excluding the above items.

Adjusted Net Income attributable to Time Warner Inc. common shareholders and Adjusted EPS are considered important indicators of the operational strength of the Company’s businesses as these measures eliminate amounts that do not reflect the fundamental performance of the Company’s businesses. The Company utilizes Adjusted EPS, among other measures, to evaluate the performance of its businesses both on an absolute basis and relative to its peers and the broader market. Many investors also use an adjusted EPS measure as a common basis for comparing the performance of different companies. Some limitations of Adjusted Operating Income (Loss), Adjusted Operating Income margin, Adjusted Net Income attributable to Time Warner Inc. common shareholders and Adjusted EPS are that they do not reflect certain charges that affect the operating results of the Company’s businesses and they involve judgment as to whether items affect fundamental operating performance.

Free Cash Flow is Cash Provided by Operations from Continuing Operations plus payments related to securities litigation and government investigations (net of any insurance recoveries), external costs related to mergers, acquisitions, investments or dispositions, to the extent such costs are expensed, and excess tax benefits from the exercise of stock options, less capital expenditures, principal payments on capital leases and partnership distributions, if any. The Company uses Free Cash Flow to evaluate its businesses and this measure is considered an important indicator of the Company’s liquidity, including its ability to reduce net debt, make strategic investments, pay dividends to common shareholders and repurchase stock. A limitation of this measure, however, is that it does not reflect payments made in connection with securities litigation and government investigations, which reduce liquidity.

A general limitation of these measures is that they are not prepared in accordance with U.S. generally accepted accounting principles and may not be comparable to similarly titled measures of other companies due to differences in methods of calculation and excluded items. Adjusted Operating Income (Loss), Adjusted Net Income attributable to Time Warner Inc. common shareholders, Adjusted EPS and Free Cash Flow should be considered in addition to, not as a substitute for, the Company’s Operating Income (Loss), Net Income attributable to Time Warner Inc. common shareholders, Diluted Income (Loss) per Common Share and various cash flow measures (e.g., Cash Provided by Operations from Continuing Operations), as well as other measures of financial performance and liquidity reported in accordance with U.S. generally accepted accounting principles.

ABOUT TIME WARNER INC.

Time Warner Inc., a global leader in media and entertainment with businesses in television networks, filmed entertainment and publishing, uses its industry-leading operating scale and brands to create, package and deliver high-quality content worldwide through multiple distribution outlets.

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