Time Warner lifts curtain on HBO growth, readies Time spinoff

Wed Feb 5, 2014 5:14pm EST
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By Liana B. Baker

(Reuters) - Time Warner Inc broke out the financials for its premium movie network HBO on Wednesday for the first time, giving investors a better picture of how the unit stacks up against video streaming service Netflix Inc.

Netflix was one of the best-performing stocks last year and analysts said Time Warner wants more recognition from investors for the strength of HBO and its streaming product, HBO Go, which has a similar feel to Netflix. The effort to highlight the digital aspect of its business comes as the company prepares to spin off its slow-growth magazine publishing business Time Inc.

"Perhaps the Street should put a higher multiple on the HBO business. It's the largest potential competitor to Netflix, which is trading at such a high multiple," said Gabelli & Co analyst Brett Harriss, adding HBO's performance last year was in line with his estimates.

HBO, which said adjusted operating income rose 8 percent to $1.7 billion last year, is much more profitable than Netflix, but it has also been around much longer and is growing more slowly. Netflix posted $112.4 million in net income last year.

HBO's revenue increased 4 percent to $4.9 billion, compared with Netflix's revenue which rose 21 percent last year to $4.37 billion. Time Warner Chief Executive Jeff Bewkes said HBO recorded its biggest gain in domestic subscribers in 17 years, about 2 million last year, a figure that includes subscribers for HBO's sister channel Cinemax.

But these subscriber gains did not generate any revenue, executives said, due to some of HBO's agreements with cable operators that allow the providers to keep some of the money it makes from subscribers.

"We definitely think, and we are doing it, that we can grow the sub base," said Bewkes. "You can see the result of those investments in programming and sub growth we have had in the last couple years."

The company also said it would spin off its Time Inc publishing unit in the second quarter and put $1.3 billion in debt on its balance sheet. In contrast, when News Corp and Fox separated last year, the publishing unit was not loaded with any debt and it was given $2.6 billion in cash. Time Warner has not yet said how much cash will be on the publishing company's balance sheet.   Continued...

The Time Warner building in New York, December 11, 2013. REUTERS/Eric Thayer