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"Game of Thrones" Helps Time Warner Go Out With a Bang

In what's likely to be its last quarterly report before merging with AT&T (NYSE: T), Time Warner (NYSE: TWX) posted earnings results this week that demonstrated the value of hit TV and movie content.

Each of the entertainment giant's core divisions posted higher sales and profits thanks to a portfolio of releases that did well both in movie theaters and in homes, including the horror film It and Game of Thrones.

Here's how the headline results compared to the prior-year period:

 Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Revenue

$7.6 billion

$7.2 billion

6%

Net income

$1.37 billion

$1.47 million

(7%)

Earnings per share

$1.73

$1.86

(7%)

Data source: Time Warner.

What happened this quarter?

The company endured falling advertising revenue at its core TV broadcast division, but higher subscription fees offset the pain from a shrinking pool of cable subscribers. Time Warner's HBO and Warner Bros. segments, meanwhile, posted solid growth to push the overall business higher.

Image source: HBO.

Highlights of the quarter included:

  • Turner's 3% advertising decline marked an improvement over the prior quarter's drop. The segment got help from subscriber growth in international markets, which offset lower subscriber numbers in the U.S. Operating profit rose 7% to just under $1.3 billion.
  • The HBO division jumped 13% -- its fastest growth pace in 13 years -- as the seventh season of Game of Thrones averaged 33 million viewers to establish a record for an HBO original series. Time Warner continued to pour resources into new programming and into marketing its stand-alone streaming product.
  • Warner Bros. enjoyed a spike in operating profit thanks to big box office numbers from It.
  • Time Warner's net income fell due to higher tax payments and a spike in costs related to the AT&T merger, yet its operating income rose by a healthy 11.5%.

What management had to say

CEO Jeff Bewkes said the numbers met management's high expectations. "We delivered very strong third-quarter results, keeping us on track to achieve our objectives for 2017," he said in a press release. Bewkes noted that the success of It added to a great run at the box office for the company, with Dunkirk, Wonder Woman, and Annabelle: Creation all contributing to its No. 1 spot among movie studios so far in 2017.

Executives believe the HBO platform has a bright future ahead, too, having just dominated the Emmy awards for the 16th straight year following a blockbuster run for its Game of Thrones series. "These highlights reflect our continued focus on executing our strategy, which includes both creating the most engaging content and advancing the ways that consumers can enjoy and experience our content and brands across platforms," Bewkes said.

Looking forward

Bewkes and his team affirmed their broad 2017 targets that call for high-single-digit profit gains. As for the specific operating divisions, they see advertising growth returning to the Turner segment next quarter even as expenses moderate. Profitability will shrink at HBO, meanwhile, due to the timing of original content spending. And Warner Bros. will see its earnings dip slightly, as the prior-year period benefited from the hit Suicide Squad release.

Time Warner still thinks its merger is on track to meet all regulatory conditions and finalize before the end of the year. After that, its growing portfolio of TV and film content is set to begin lifting AT&T's operating results.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.