Time Warner reported lower second-quarter profits because of a drop in its film and publishing revenue.
Ad revenues at Time Warner's TV networks rose just 2%, partly because of plummeting primetime ratings at CNN, which began a management shakeup with CNN Worldwide president Jim Walton announcing his departure last month.
"Although CNN's ratings declined in part due to very difficult comparisons with last year, to be clear, we are not satisfied with CNN's ratings performance and we're focused on fixing it," Time Warner CEO Jeff Bewkes said on the company's earnings conference call with analysts Wednesday.
"We're going to do a better job putting on programming that will hold the audience," Bewkes said. "If you ask where are we aiming, how do we plan to do that, [there's] strong demand for objective, comprehensive nonpartisan coverage, really covering all the partisan views as well. But we need to do it in a very compelling, more engaging way than we've been doing of late."
The company also said that for ad revenues, the third quarter would be a tougher one, although things would pick up again in the fourth quarter. And longer term, the company was looking for big increases in subscriber fees for Turner's cable networks.
In the second quarter, Time Warner's income fell 33% to $430 million, or 44 cents per share, down from $638 million, or 59 cents per share, a year ago.
Revenues fell 4% to $6.7 billion.
The company left its full-year guidance for revenues and earnings unchanged.
At Time Warner's network division, adjusted operating income rose 9% to $1.1 billion as revenue growth exceeded programming growth of 3%. The increase in programming costs was the result of higher sports payments and more original series.
Revenues rose 4% to $3.6 billion. Subscription revenue rose 6% and ad revenues rose 2%. Content revenues were down 5%.
Ad revenues at Turner were helped by higher pricing and an increase in the number of NBA games. Time Warner CFO John Martin said that domestic ad revenue growth was 6%, similar to first quarter, despite the decline at CNN, where ratings were lower. Also affecting revenues were the timing of the NCAA Men's Basketball Tournament and a shift of SI.com and Golf.com from Turner to Time Inc.
International ad revenues were down by high single digits, hurt by the shutdown of an operation in India and unfavorable foreign currency movements.
Martin warned that Time Warner was not expecting to report positive growth in ad revenues in the third quarter, but he added that the company expects a "much, much stronger Q4."
In addition to the website shifts, which will continue to affect ad revenues, and the shutdown of the Indian operations, plus another in Turkey, "third-quarter scatter demand is a little slow right now," Martin said. He attributed that to money being diverted to the Summer Olympics.
At the same time, Turner expects to have fewer Major League Baseball games in this year's third quarter than a year ago. There will be more in the fourth quarter, plus this year Turner has the American League Championship Series, which usually get higher ratings than the NLCS, he said.
"We also expect growth to be stronger in the fourth quarter as we'll benefit from additional NBA games on TNT, the 2012 presidential election, expectations of improved overall ratings at our other networks in general, some easier comparisons and the expectation of a much stronger scatter market once the Olympics are over," Martin said.
Martin said it was too early to predict how much ad sales would increase in the fourth quarter, "but we feel much better about the advertising trends going into the fourth quarter and frankly as we progress into 2013."
Bewkes added that Turner wrapped up "a very successful upfront." He said "once again we negotiated CPM and volume increases at the top end of the entire television business on both broadcast and cable network."
Turner's Cartoon Network has also been posting ratings gains as Viacom's kid business leader Nickelodeon has suffered. "We have solid prices in the kids upfront. We're able to take advantage of our ratings growth," Bewkes said.
On the affiliate revenue side, Bewkes said that "between 2013 and 2016, we'll enter negotiations with just about every distributor for just about all our basic cable networks, making it our biggest affiliate renewal cycle in years."
He said that "based in part on the deals we've already struck we have every confidence that Turner will grow domestic subscription revenue at a double-digit pace annually between 2013 and 2016."
Bewkes also said that Time Warner is in discussions with Google about the fiber cable service it is launching. Channels from NBCUniversal, Viacom and Scripps are already on the service.
"We are in pretty good discussions with them and are optimistic we'll be able to reach a deal," Bewkes said.
While Time Warner has reaped about $250 million in digital streaming syndication deals, HBO is not likely to do a deal with Netflix. "Like all subscription VOD services -- HBO, Showtime, Netflix, Amazon Prime -- they all compete, and that's probably the primary way that they have relationship is as competitors," Bewkes said. "But as you know, in the television and media business sometimes there are ways for other relationships to emerge over time. Not now, but we'll see in the future."
Martin added that the Warner Bros. TV studio also had a strong quarter. "TV revenue was up more than 20% year-over-year to more than $1 billion and operating income was up double-digits," thanks in part to the beginning of cable syndication of The Mentalist. "That's the seventh time in the last eight quarters where we had double-digit growth in TV."
Analyst Michael Nathanson of Nomura Securities said was not overly impressed. "We do not believe these results will drive excitement to the TWX story. We continue to look for signs of stronger affiliate fee growth and sustainable ratings improvements at TNT and TBS," he said.
Todd Juenger of Sanford C. Bernstein, said "we believe TWX margins will face pressure as content costs rise. At Turner, we believe affiliate fees will grow at roughly the same rate as operating expenses, with advertising growing more slowly." Juenger also said "we believe HBO will find it hard to grow subs or pricing in a world that includes multiple SVOD entrants at significantly lower price points, while cost pressures will also intensify." But he added "We love Warner Bros.' TV production business."
Bewkes started the conference call by acknowledging the movie theater shootings last month. "I want to express our profound sadness about the terrible event at the screening of the Dark Knight Rises in Colorado two weeks ago," he said. "Our deepest sympathies go out to the victims of this appalling crime, to their families and their loved ones."
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