Time Warner 4Q08 Earnings Preview

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Time Warner effectively preannounced 4Q08 results when it updated its guidance for 2008 last month. The guidance brought 2008 EBITDA to a gain of just 1% but several items were legitimately one-time so the headlines off the guidance update were more negative than management intended. Underlying growth in 2008 is probably closer to 3% which is a pretty good compared to peers and the very troubled markets for advertising and DVD sales.
I think trends at the segment level for 4Q08 are widely understood. Cable Systems will be positive but slowing as subscriber growth is under pressure even in growth areas like broadband, digital TV, and telephone. Filmed Entertainment had a good quarter thanks to The Dark Knight but faces tough comps. Cable Networks have held up well with ad growth still in positive territory. AOL is really struggling as display advertising especially at portals is under pressure. Publishing is also weak with national advertising at magazines finally succumbing to broader advertising pressures.
There will be two areas of major focus on the conference call: an update on the split with Time Warner Cable (TWC) and 2009 guidance….

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February 2009 Model Signals: Back to Growth

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Northlake’s Style model shifted from value to growth for February. Hopefully, it was only one month late. Last month was awful for value on a relative basis with the Russell 3000 Value (IWW) dropping 11.6% against a decline of just 5.6% for the Russell 3000 Growth (IWZ). The S&P 500 fell 8.6% so last month’s signal proved costly. As a result of the new signal, I swapped all positions in the Russell 1000 Value (IWD) and S&P 500 Value (IVE) into the Russell 1000 Growth (IWF).
This is the first growth signal since September. Thanks mainly to the horrible performance for value in January the signal proved inaccurate. Since the value signal went into effect on the first trading day of October, IWZ was down 27.4% and IWW was down 31.8%.
At the indicator level, five factors now favor growth and four favor value. The only shift last month was the trend indicators which now favor growth. These indicators reflect the outperformance for growth in January which has swung the three and six month technical measures that comprise the trend indicators to growth. The trend indicators are included in the model to help with timeliness. One month late is frustrating especially when the last month of the prior indicator performs badly but the goal of this model is to predict relative performance over a six to twelve month period.
There was no change to the signal from the Market Cap indicator….

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P&G Still Spending

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My daily email from All Things Digital had an interesting tidbit on the advertising market. Procter and Gamble is the largest US advertiser and CEO A.G. Lafley was quoted as follows from last week’s earnings call:
“We have held our marketing spending, advertising spending and in fact what is really going on is the advertising markets are softening and for the same dollar we are buying more delivery… we have been shifting support in general to the store and the point of purchase… It is couponing in markets where couponing is a well established consumer habit and coupon redemptions go up in recessionary times. In markets like the U.S. we have clearly shifted dollars to coupons…Then depending on the market we are doing more digital and there are a number of categories that are doing quite well with the digital.”
On the one hand, this is positive for ad supported media as it reminds investors that there is a reason to keep spending to support brands, products, and services even as volumes soften. However, it seems quite clear that PG is able to get the same amount of exposure in traditional media like TV and radio by spending less because the price per spot they are paying has fallen. $100 million might have bought X minutes early in 2008. In 2009, the price of those spots might be down 10-20% so PG can spend $10-20 million less on the same campaign and still get X minutes and the same reach.
Those dollars appear to be getting redirected to coupons and digital campaigns. The shift to coupons is cyclical but the shift to digital is cyclical and secular. Overall, the picture for advertising remains bleak and still has not bottomed on a cyclical basis. The only thing an investor can do is look for pockets of relative strength. Digital (Google’s decent report) and possibly cable networks (we hear from Disney, Time Warner, News Corporation, and Scripps Interactive this week) represent relative strength.

Monday Media Musings: February 2, 2009

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The Super Bowl, the biggest media and advertising event of the year is over. I don’t have any Monday Media Musings about the big game but there is still plenty going of other things going on in the media world.

Televisa and Univision Settle

Televisa (TV) and Univision settled their long standing litigation. TV will receive higher royalty fees under its deal to provide exclusive programming to Univision until 2017. Terms were not disclosed but all the incremental revenue will flow to the bottom line for TV. TV will not be taking an equity stake in Univision which was perceived as a possible negative outcome for TV in any settlement. The settlement is good news for TV shares. TV is a good stock to keep on your radar screen in anticipation of an eventual upturn in advertising.

Paramount Going Solo on 3-D Screens

Viacom’s Paramount studio will be providing financing alternatives to theaters to help with digital and 3-D upgrades. Paramount will distribute several high profile 3-D films in 2009 and has a long-term tie with Dreamworks Animation (DWA), which is at the forefront of the 3-D movement. Clearly, Paramount has extra incentive to get the lagging 3-D upgrade cycle moving. The terms look to be neutral to Paramount from a financial perspective. If 3-D can charge a premium ticket price and proves popular, there is upside for Paramount on the distribution side. Other winners from 3-D include DWA and Disney (DIS) as animated films is where most of the releases will be.

Uncertainty Over Digital TV Transition

The Senate voted unanimously to delay the digital TV transition from February to June. In a surprising move, the House blocked the move as House Republicans used minority veto power on this particular piece of legislation to block it. As many as 6-7 million homes currently receive only analog signals and will be cut off from TV reception without a converter or a subscription to cable or satellite TV. The transition is a small positive to cable and satellite companies as some significant portion of the analog households will likely subscribe. The other alternative is purchase a government subsidized digital converter. A delay is designed to allow more access to converters so it would be a modest negative to cable and satellite companies as fewer households would opt for a subscription. Given the unanimous vote in the Senate I think the delay could be back on the table setting up a small short side trading opportunity in the cable and satellite stocks.

Movie Production and Releases are Falling

Variety reported that there will be about a 5% drop in movie releases in 2009 with most of the decline emanating from the major studios owned by the big entertainment conglomerates. The writers strike and now fear of an actors strike are one factor behind the drop but mostly the big studios are looking to cut costs. Production and marketing costs can easily run from $50 to $150 million per film and many pictures are not profitable. The major studios are choosing to focus on fewer big franchise films, looking for one or two winners per year that can produce operating profits of several hundred million through the initial windows. A slightly less crowded release schedule also may give films a bit more time to find legs. Theater owners could see higher margins if films develop greater legs but the studios stand to benefit the most from cost savings. If a studio could actually consistently produce blockbusters it would be a big help to financial results but the creative side is impossible to predict.

Cinema Advertising Holding Up Well

National Cinemedia (NCMI) rose about 15% Friday after preannouncing 4Q results at the high end of expectations and providing a preliminary 2009 outlook for flat results. Given the virtual collapse in other advertising driven media these are fantastic results. Cinema ads are major growth story in advertising. In the US cinema ads have a low single digit market share but reach upper single digits in Western Europe. Studies show high recall and advertisers can be highly confident of knowing how many people they are reaching. As cinema advertising market share increases, NCMI is poised to be a growth stock when advertising growth resumes. There is always risk of an unusually bad year at the movies but the underlying business is healthy and growing, something that can not be said about many advertising categories. The stock looks a little expensive on the new guidance but is another one to keep on your potential buy list.

CETV Update

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CETV shares are approaching their November low including a 2-day drop of over 20% last Thursday and Friday. I received a bunch of emails asking for an update.
CETV has been closely tracking currency. As the euro and CEE currencies weaken the stock goes down. The December rally (more than a double) coincided with those currencies strengthening. Besides the huge impact on CETV’s US$ reported results I think the currencies reflect the opinion of fundamentals in CEE markets for GDP and advertising. Right now, you have the currencies weakening rapidly indicating that the ad markets are going too be worse than management or some current estimates suggest.
There are other issues. First, several analysts have slashed estimates in local currency, assuming negative year over year growth even in markets where management says they will be positive (most notably the Czech Republic which is supposedly 70% sold for 2009 at positive local currency growth). The new lower estimates lead to a 30-40% decline or in US$ EBITDA due to currency translation. Second, if the low estimates for US$ results are accurate, the company will be very close to or in violation of debt to EBITDA covenants. There is no danger of CETV not meeting their obligations but technical covenant violations are not good news for any stock at any time. Third, the one year early exit of CEO Michael Garin leaves the company thin and without an American in the senior ranks. I think new COO and de facto CEO Adrian Sarbu and his operating team are superb but communication with and confidence of the street is lacking. Fourth, the company’s 2008 expansion into Bulgaria and increase in ownership in Ukraine was poorly timed and now looks very expensive. Bulgaria looks like a waste of $170 million ($4.50 per share) given the need to build from the ground up against established competitors owned by Western companies. Ukraine still should be a huge market five to ten years down the road but right now it is considered a defaulted country and has no or negative value in investor eyes. The gas dispute, IMF bailout, and never ending political turmoil reinforce the negative perceptions and eliminate a positive view of the future….

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