TW, News Ride Cable’s Wave

8/08/2008 8:00 PM Eastern

Despite fears that a recession is cutting deeply into advertising budgets, two of the largest content providers in the country reported strong earnings last week, fueled by big gains in cable advertising.

The results for News Corp. and Time Warner Inc. appear in sharp contrast to cable network juggernaut Viacom, which earlier last month reported a measly 1% gain in domestic advertising revenue.

That was particularly distressing given that cable networks have consistently taken viewers away from their broadcast rivals. According to June Nielsen Media Research data, non-pay cable networks averaged a 67 viewership share in primetime, double the broadcast networks’ 32 share.

By the Numbers
News Corp. ($ in millions)
F4Q08 F4Q07 % Change
SOURCE: Company reports
Cable Networks Revenue $1,385 $1,095 26.5%
Operating income $313 $284 10.2%
Time Warner Inc. ($ in millions)
2Q08 2Q07 % Change
SOURCE: Company reports
Cable Networks Revenue $2,826 $2,601 8.65%
AOIBDA $860 $746 15.3%
Operating income $749 $634 18.1%

In an interview last week, Miller Tabak media analyst David Joyce said the stronger results from News Corp. and Time Warner show that the shift in viewers from broadcast networks to cable networks is having positive results for the cable companies.

“Ad buyers still have a tendency to want to buy broadly,” Joyce said. “They’re going to where there is growth in ratings and growth in viewership and that’s in cable networks.”

Joyce said that Viacom had its own issues.

“There was a shift going on in the advertising market that they weren’t prepared for,” Joyce said.

The analyst added that the troubles could be a combination of older-skewing viewers at some Viacom networks, such as TV Land, coupled with younger viewers moving away from TV and spending more time online.

“Their traditional, core younger-skewing cable networks may be losing share to other media usage by consumers, rather than to other competitors,” Joyce said.

But other cable-network conglomerates, especially those that cater to an older audience than MTV, showed strong ad growth.

News Corp. kicked off the week, reporting a 16% rise in overall revenue to $8.6 billion on Aug. 5. Operating income at the media giant rose 21.3% to $1.5 billion.

Fueling those increases were big gains at its Fox Cable Networks, which reported a revenue gain of 26.5% to $1.4 billion and a 10% rise in operating income to $313 million. Although News Corp. does not break out advertising revenue in its financial statements, chief operating officer Peter Chernin said on a conference call last week that national ad sales at its cable networks were strong.

“In the national cable market, we’re seeing quite good strength,” Chernin said.

Pali Research media analyst Rich Greenfield agreed.

“National television advertising particularly on the cable network end, is continuing to hold up better than investors expected,” Greenfield said. “So far, the results from the major media companies have supported that thesis.”

The analyst added that he expects cable network ad sales to slow a bit in the third quarter, but to reaccelerate in the fourth quarter after upfront results are layered in.

That should be good news for some media companies, who are beginning to rely more on cable networks offsetting declines at their broadcast networks.

That was certainly true for News Corp., which reported revenue of $279 million, a 28% decline over the same period last year in its television segment, including the Fox Broadcasting Co. and its television stations.

Leading News’s cable networks was its Fox News Channel, which reported operating income growth of 14% for the quarter, primarily from increased affiliate fees and advertising revenue. For the year, Fox News viewership was 59% higher than its nearest competitor in primetime and nearly 54% higher on a 24-hour basis.

Although cable network results were strong, the company spooked some investors with conservative guidance for the coming year.

Citing potential difficulties due to a looming recession, credit and consumer issues and delayed releases of some of its films, News Corp. issued fiscal 2009 operating income guidance of 4% to 6%, well below some analysts’ guidance.

Joyce warned in a research note last week that the “gloomy macro guidance is going to cast a cloud over the sector again.”

News Corp. shares dipped nearly 5% (76 cents per share) to $14.49 on Aug. 6. Time Warner and Viacom fared better — Time Warner stock dipped 5 cents per share to $14.83 and Viacom dipped 15 cents each to $29.19 on Aug. 6. Both stocks have been hit hard for the year — Viacom is down 31.4% and Time Warner has fallen 8.9% since Jan. 2.

Though Viacom’s declines have basically stemmed from worsening ad revenue, Time Warner saw its shares dip despite what appeared to be a strong quarter.

Overall, Time Warner reported revenue growth of 5% to $11.6 billion and adjusted operating income before depreciation and amortization (AOIBDA) grew about 4% to $3.2 billion.

Leading the charge was the cable networks division, which includes Turner Broadcasting System and Home Box Office. Revenue at the cable networks rose 9% to $2.826 billion in the quarter and AOIBDA rose 15% to $860 million. Cable network results were bolstered by an 11% gain in advertising revenue.

On a conference call with analysts, Time Warner CEO Jeff Bewkes said that the networks were helped by big ratings gains at CNN, TBS and TNT.

Bewkes added that ratings in key primetime demographics are up more than 20% at CNN. Bewkes said that while the presidential election has helped the news channel’s ratings, CNN’s current ratings are up 20% compared to the second quarter of 2004, the last presidential election.

“We’re also taking share,” Bewkes said.