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Joshua Cho
It was a busy week for Time Warner, Inc. In the span of a few days it announced a monumental joint venture with AT&T Corp., as well as its fourth quarter and year-end results, with its cable networks helping to propel the company to record gains.
In a prepared statement, Time Warner chairman and CEO Gerald Levin said, "In addition to our strong operating growth, we substantially reduced our debt, strengthened our balance sheet, and achieved solid investment-grade status....We are committed to our financial plan and will continue to be opportunistic in leveraging our assets into new growth opportunities."
Analysts generally applauded the earnings announcement. Jessica Reif Cohen of Merrill Lynch said the company's earnings were "better than expected."
Cohen said that she's estimating Time Warner to have $12 billion in excess financial capital over the next three years, of which the company said it was targeting $5 billion for share repurchases. Merrill is also estimating the company to have free cash flow growth of 50% or more in the next three years, since the company will be able to leverage its infrastructure-in any of its cable, publishing, entertainment or cable networks business segments-using little incremental capital.
"There's a lot of infrastructure to create new business with," Cohen said.
The company, which reports its earnings under Time Warner Inc. and Time Warner Entertainment Company, L.P. said Feb. 3 that it had combined an all-time record fourth quarter operating income before amortization and intangible assets (EBITA) of $1.368 billion and revenues of $7.464 billion compared to EBITA of $1.291 billion and revenues of $6.974 billion in the fourth quarter of 1997. This represents an increase of 6% and 7%, respectively.
For the 1998 fiscal year, the companies posted combined EBITA of $4.462 billion compared to EBITA of $4.033 billion in the previous year, an increase of 11%. Likewise, fiscal 1998 revenues for the combined companies came in at $26.838 billion compared to $24.622 in the previous year, a 9% increase. However, according to Time Warner, when these figures are normalized for the effects of cable-related transactions that transpired in 1998 and 1997, EBITA and revenues grew by 18% and 9% for the fourth quarter, respectively, and 14% and 11% for the year, respectively.
The cable networks-TBS segment, which includes the operations of the TBS Superstation, CNN Headline News, the Cartoon Network, TNT, CNN and World Championship Wrestling, reported fourth quarter EBITA of $201 million, a 21% increase over the $166 million EBITA in the same period last year. The segment brought in $866 million in fourth quarter revenue compared to $808 million in last year's fourth quarter. For the year, this segment posted EBITA of $706 million on revenues of $3.3 billion.
The company attributed the increases to higher subscription and advertising revenues led especially by the Superstation, which converted to a basic cable service in January 1998.
The HBO segment, which falls under the Entertainment Group umbrella, had its fourth quarter EBITA increase 15% to $115 million from $100 million on a year-over-year basis, on revenues of $526 million. This segment includes the operations of premium pay nets HBO and Cinemax, as well as cable net Comedy Central and the new HBO multiplex lineup, which were launched in October 1998. For the year, the segment had EBITA of $454 million on revenues of $2.1 billion. Increases were attributed to higher subscription revenues from HBO and Cinemax.
The cable operations, which are reported both under Time Warner Inc. and the Entertainment Group, had combined fourth quarter EBITA of $448 million, including one-time gains from the exchange or sale of cable systems, compared to $536 million in the same period last year.
For the year, the segment had EBITA of $1.694 billion on revenues of $5.342 billion. The companies attributed the gains to basic cable and advertising revenues. The cable segment has some 12.6 million subscribers and 20.6 million homes passed, or roughly one-fifth of the nation's television households.
In other news, Time Warner and MediaOne Group said Feb. 2 that they were trading systems that resulted in the transfer of roughly 700,000 customers. Time Warner will receive about 350,000 customers from MediaOne systems in Ohio, Maine and Calif.; MediaOne will garner roughly 310,000 customers from Time Warner systems in Mass., N.H. and Ga. An undisclosed amount of cash also changed hands in the transaction.
Also: Scientific-Atlanta, Inc. announced that demand for digital television helped boost second quarter revenues to record levels. Second quarter revenues came in at $310.7 million compared to $294.5 million in revenues the company had in the same period last year. The company attributed the increases to strong domestic sales of its Explorer 2000 interactive digital setops and network transmission equipment.
Second quarter net earnings also hit a record at $19.2 million, or 25 cents per share, compared to the net earnings of $14.8 million, or 19 cents per share, in the second quarter of 1998. S-A said that earnings reflect a 9 cents per share boost due to the sale of a portion of its Broadcom Corp. stock during the quarter.
The company's satellite business, unlike the set-top box sector, continued to show weakness due to economic downturns overseas and the subsequent lower volume of product being ordered. S-A said it restructured this segment of its business during the second quarter and is expecting a turn-around in the third quarter.
The satellite sector contributed to roughly $12 million of debookings due to delayed orders overseas because of the economic strife there, according to S-A president and CEO Jim McDonald. Total bookings for the quarter came in at $290.5 million compared to $312.6 million on a year-over-year basis.
According to the company, 17 cable operators in the U.S. and Canada currently have plans to use S-A digital interactive set-tops in their systems. They include Time Warner, which during the second quarter bought 100,000 Explorer 2000 digital set-tops. Time Warner also bought over 30 digital network systems from S-A as part of its Pegasus real-time digital network rollout.
Bresnan Communications, TCI and Blackstone Capital Partners III Merchant Banking Fund L.P. said Feb. 2 that they had formed a partnership originally announced last June 5. The partnership was formed out of a pre-existing partnership between TCI and Bresnan with the addition of around 416,000 customers from other TCI systems. The new 644,000 subscriber partnership operates systems in the Midwest. It is called Bresnan Communications Company Limited Partnership.
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