Revenues increased 9% to $7.5 billion in Q1. Adjusted Operating Income grew 7% to $1.5 billion. Operating Income increased 37% to $1.9 billion. Adjusted Operating Income and Operating Income margins were 20% and 26% in the first quarter of 2014, respectively, compared to 21% and 20% in the prior year quarter, respectively.
Adjusted EPS was of $0.91, up 20% from $0.76 for the year-ago quarter. Diluted Income per Common Share from Continuing Operations was $1.42 compared to $0.79 in the prior year quarter.
For the first quarter, Cash Provided by Operations from Continuing Operations reached $1.7 billion and Free Cash Flow totaled $1.7 billion. As of March 31, 2014, Net Debt was $16.7 billion, down from $18.3 billion at the end of 2013, due to the generation of Free Cash Flow and proceeds from the sale of the Company’s office space in Time Warner Center, offset in part by cash used for share repurchases and dividends.
Results Excluding Time Inc.
Revenues were up 10% to $6.8 billion in the quarter to growth at Warner Bros., Turner and Home Box Office. Adjusted Operating Income grew 12% to $1.6 billion also due to increases at Warner Bros., Turner and Home Box Office. Operating Income increased 44% to $2.0 billion. Adjusted Operating Income and Operating Income margins were 24% and 30% in the first quarter of 2014, respectively, compared to 23% and 23% in the prior year quarter, respectively.
In Q1, the company posted Adjusted EPS excluding Time Inc. of $0.97 versus $0.77 for the year-ago quarter. Diluted Income per Common Share from Continuing Operations was $1.50 for the quarter compared to $0.80 for last year’s first quarter.
Cash Provided by Operations from Continuing Operations excluding Time Inc. reached $1.7 billion and Free Cash Flow excluding Time Inc. totaled $1.7 billion.
Said CEO Jeff Bewkes: “We are off to a very strong start in 2014, with results that demonstrate both the returns we can achieve on our investments in great storytelling and the growth potential of our businesses. Excluding Time Inc., which we expect to spin off as an independent publicly-traded company this quarter, we grew first quarter Revenues by 10%, Adjusted Operating Income by 12%, and Adjusted EPS by 26%. In the first quarter, Warner Bros. picked up where it left off after a record-breaking year in 2013, with The LEGO Movie launching yet another franchise for us and leading all releases at the domestic box office. Combined with its promising slate of movies for the rest of the year and strong lineup of TV shows to be unveiled at the upfronts, Warner Bros. is positioned to have another excellent year in 2014. Home Box Office continues to be red hot, led by the debut of True Detective, the most-watched freshman series in HBO’s history. And the Season 4 premiere of Game of Thrones on April 6 drew HBO’s largest audience since The Sopranos finale. Turner also made history by bringing the NCAA Men’s Basketball Final Four to cable for the first time ever. The success of the NCAA Tournament also helped TBS maintain its position as ad-supported cable’s #1 network in primetime among adults 18-34 and 18-49. It also showcased the importance and vibrancy of our TV Everywhere initiatives, with a more than 40% increase in streams for our March Madness Live service over last year. Another standout at Turner was Adult Swim, which again finished the quarter as the #1 ad-supported cable network in total day for Adults 18-34. And CNN reaffirmed that it is the place the world goes for authoritative coverage during major news events, with delivery in its key demographic up over 50% in March. Further demonstrating our commitment to shareholder returns, during the quarter we returned almost $1.3 billion to our shareholders in the form of share buybacks and dividends.”
In January, the board authorized a total of $5 billion in share repurchases beginning 1/1/14, which replaced the amount remaining under the prior authorization. From January 1, 2014 through 4/25/14, the company repurchased 20 million shares of common stock for $1.3 billion.
Noted Marci Ryvicker, Wells Fargo Securities Senior Analyst: “TWX provided more visibility on Turner’s domestic subscription revenue growth. On past calls, mgmt guided to double-digit (DD) domestic affiliate growth (on average) for the 2013-2016 period. This morning (4/30), they extended that guide to 5 years–as they’ve already signed a number of deals that stretch past 2016–giving investors more visibility.
Management thinks they can deliver EPS growth of low to mid-teens (”if not better”) for AT LEAST 3-4 years. Earlier today, TWX raised their outlook for 2014 EPS growth to low teens from LDD. Mgmt emphasized on the call they’ve grown low teens every year for the past 5 years, and expect to do so for at least the next 3-4 years.
TWX is accelerating its share buyback, and now expects to hit its revised net leverage target in 2014. Recall on the Q4 earnings call that mgmt raised its buyback authorization to $5B and increased its net leverage target to 2.75x from 2.5x (expecting to reach it in 2015). While we don’t know the exact target for repurchases this year, we (and most of the Street) estimated a $4B buyback–and with today’s comments, we wouldn’t be surprised if they now hit $5B.
The Q2 advertising guide was soft. While the tone of the call sounded great over the long term (LT), there are near-term (NT) ratings challenges at TNT and truTV that are weighing on Turner. Mgmt guided Q2 advertising ”at the low end” of LSD growth, even with a 300bps boost from the Final Four. Although TWX is investing in new programming to draw in a younger demo, a turnaround is not expected in the next 1-2 quarters.
HBO’s SVOD deal with Amazon not expected to significantly benefit 2014. Mgmt was clear that the recently signed deal will boost Q2 revenue, but will mostly be used for reinvestment, so the bottom line impact is expected to be minimal. In addition, HBO will be recognizing revenue relatively evenly over the multi-year agreement.”