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Time Warner Inc. (TWX), the diversified media conglomerate, recently posted better-than-expected third-quarter 2011 results. The quarterly earnings of 79 cents a share beat the Zacks Consensus Estimate of 75 cents, and surged 27% from 62 cents earned in the prior-year quarter on the heels of the box office success of ‘Harry Potter and the Deathly Hallows: Part 2’ by Warner Brothers, higher television advertising demand and increase in television license fees.

On a reported basis, including one-time items, earnings came in at 78 cents a share, reflecting a steep rise from 46 cents delivered in the year-ago quarter. Time Warner now projects, high teens growth in fiscal 2011 earnings per share. Earlier, the company had forecasted earnings growth in the low teens at the least.  

The analysts polled by Zacks, estimate fiscal 2011 earnings at $2.78 per share, reflecting an increase of 15% from the prior year earnings of $2.41. The shares of Time Warner rose $1.16 or 3.4% during pre-market trading.

Time Warner’s total revenue in the quarter grew 11% to $7,068 million from the prior year-quarter registering growth across Networks and Filmed Entertainment segments, and handily beat the Zacks Consensus Estimate of $6,952 million. Adjusted operating income during the quarter climbed 18% to reach $1,605 million, whereas operating margin expanded 140 basis points to 22.7%.

The company has been expanding its digital presence to facilitate consumers to enjoy contents on more platforms and devices. Recently, ‘The CW Television Network’, a joint venture between CBS Corporation (CBS) and Time Warner, entered into licensing deals with Netflix and Hulu, whereby both will gain access to an array of shows aired on ‘The CW’.

Segment Details

Networks division’s revenue, which includes Turner Broadcasting and HBO, rose 7% to $3,208 million, driven by an increase of 6% in subscription revenue and a jump of 9% in advertising revenue. Adjusted operating income for the segment dropped 4% to $1,093 million attributable to a rise in programming and marketing costs.

Time Warner’s Filmed Entertainment segment revenue surged 19% to $3,297 million attributable to robust performance of ‘Harry Potter and the Deathly Hallows: Part 2’ and increase in television license fees, partially offset by a fall in home video revenue.

Adjusted operating income for the division, which comprises Warner Brothers, came in at $528 million, reflecting a sharp increase from $209 million in the prior-year quarter, on the heels of increased revenue, lower film valuation adjustments and fall in pre-release advertising expenses, partly offset by a rise in overhead expenses.

Publishing revenue nudged down 1% to $889 million reflecting a 1% decline in subscription revenue and a 3% fall in advertising revenue, partly offset by a jump of 5% in other revenue. The segment’s operating income plunged 12% to $124 million from the prior-year quarter, principally due to a fall in revenue and rise in expenses, which includes higher paper costs.

Other Financial Discussions

Time Warner ended the quarter with cash and cash equivalents of $3,245 million, long-term debt of $18,511 million, reflecting a debt-to-capitalization ratio of approximately 37.3%, and shareholders’ equity of $31,166 million.

During the quarter, Time Warner generated free cash flow of $1,108 million and incurred capital expenditures of $174 million.

Year-to-date through October 28, 2011, Time Warner has bought back 110 million shares, aggregating $3.7 billion. The company in January 2011 had increased its share repurchase authorization to $5 billion from $1 billion as of December 31, 2010.

Currently, we have a long-term Neutral rating on the stock. Moreover, Time Warner, which competes with News Corporation (NWSA) and Walt Disney Company (DIS), holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation, and correlates with our long-term view.

 
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