Shares of Time Warner fell more than 10% after the company said it anticipated spending more heavily on original programming in 2016, and that ongoing subscriber losses at Turner Broadcasting were larger than previously expected.
The investor worries over next year’s headwinds came after the media conglom posted third-quarter 2015 earnings that beat Wall Street expectations, while reiterating full-year 2015 expectations.
Time Warner’s stock price fell to around $70.34 per share in mid-morning trading, down about 9% from the previous closing price.
Other media stocks dropped in the wake of the Time Warner disclosure, although not as steeply. Companies trading lower than broader market indices included 21st Century Fox (which missed Q3 revenue expectations in reporting Wednesday), Viacom, AMC Networks and Disney. The pullback was reminiscent of the panic that struck the sector in August on fears of a pay-TV slowdown, triggered by Disney revealing subscriber losses for ESPN in Q2 and exacerbated by macroeconomic factors.
CEO Jeff Bewkes said on a call with analysts Wednesday that earnings per share for 2016 are expected to be around $5.25 per share, down from its previous guidance of EPS of $6. Most of that, about 50 cents of the projected EPS, will be because of unfavorable foreign-exchange rates, according to Bewkes. But, the lower guidance also reveals that Time Warner will be boosting investments in 2016.
“We have also identified additional investments and key decisions that will weigh on earnings that we think will drive long term growth,” Bewkes said.
“Programming remains by far the most significant area of investment for the company. We have plans to invest aggressively in 2016 and beyond,” he continued. As examples of aggressive content spending, Bewkes cited HBO’s recent deals with Jon Stewart, Bill Simmons, “Sesame Street” and Vice Media, as well as Turner’s recent pact with WME/IMG to launch an eSports league.
Bewkes, seeming to anticipate the negative investor reaction, said in his prepared remarks before announcing the lower 2016 expectations, “It’s important that our primary focus be on long-term competitive position and growth rather than near-term profitability.”
Bewkes also said Time Warner was evaluating whether to hold back rights to programming longer for its own platforms, instead of licensing it to subscription VOD players like Netflix. That would push SVOD windows to be similar to traditional syndication deals, he said.
Time Warner CFO Howard Averill, also on the earnings call, said Turner’s U.S. subs have declined 1% beyond what the company had previously assumed, and he added that those cord-cutting losses will continue into 2016. In Q3, Turner domestic subscribers declined 1.5% on average, which was consistent with trends in the first half of 2015.
Turner, which plans to rebrand TBS and TNT for younger-skewing audiences in 2016, is “evaluating the current fit of certain programming” for those networks, Averill said. That could result in a write-down in the fourth quarter of 2015, but the CFO added that it would be nowhere near the $482 million charge Time Warner took in Q3 of 2014 related to programming phase-outs.
The company’s acknowledgement that Turner’s networks are losing subscribers more quickly than originally anticipated appeared to rekindle Wall Street’s concern over cord-cutting or “cord-shaving” (consumers trading down to smaller-bundle TV packages). Better-than-expected Q3 video subscriber results at Comcast, Time Warner Cable and Charter may have calmed investors somewhat, but all indicators keep pointing to the pay-TV universe’s ongoing contraction.
One area Time Warner may seek to boost content investment in is sports. Broadcast rights for Major League Baseball, National Basketball Association and NCAA March Madness games have “helped make TBS and TNT the No. 1 and No. 4 cable networks in primetime year to date respectively,” according to Bewkes.
Turner Broadcasting CEO John Martin, said he would be interested in the NFL’s Thursday night football package — currently held by CBS — if that opportunity arose.
“We think it would be a great fit within the Turner brand… If and when the Thursday night package comes available it’s something that we would look at.” Martin added, though, “I want to remain clear that our intention would be to remain very fiscally responsible.”