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Time Warner Q3 Studio Results Exceed Expectations

4 Nov, 2009 By: Erik Gruenwedel

Time Warner Inc.’s filmed entertainment division, which includes Warner Bros. Pictures and Warner Home Video, became the second studio this week to report an upturn in profitability despite the ongoing economic recession.

Studio operating income increased 6% ($16 million) to $291 million, due mainly to lower amortization expenses ($13 million). Warner Bros. also cut sales, general and administrative (SG&A) costs by double-digit percentage while increasing marketing spend.

Theatrical film revenue from third-quarter 2009 releases, such as Harry Potter and the Half-Blood Prince and The Final Destination, as well as carryover from The Hangover, were slightly lower than in the prior-year quarter, which benefited from the success of The Dark Knight.

Studio revenue declined 4% ($101 million) to $2.8 billion, due primarily to lower revenue from home video and interactive games, and the unfavorable impact of foreign exchange rates.

“I think the home entertainment environment is stabilizing and will continue to next year,” Time Warner chairman and CEO Jeffrey Bewkes said in a call with analysts. “The retail environment is still challenging. There is a little less shelf space some of the big retailers are putting toward DVD and home video.”

Bewkes said he believed the “big pressure” on physical sellthrough had moderated a bit. And he expects to see continued growth in rental, electronic sellthrough, cable VOD and Blu-ray Disc.

“We think the net contributions will increase due to the higher margin digital elements of home video,” he said. “We are very optimistic.”

The CEO said that despite a soft home entertainment market, Warner Bros. was on track to post the studio’s highest fiscal year profits. The studio is also on track to equal or beat last year’s $1.9 billion box office haul despite releasing fewer movies in 2009.

The studio also reported lower-than-anticipated home video returns from retailers of about $25 million. It has generated $85 million in restructuring charges this year compared to $130 million in 2008 with the shuttering of New Line Cinema.

“Going into this quarter, we fully expected our adjusted [earnings before taxes] to be down year-over-year,” said CFO John Martin. “[But the studio] has done a phenomenal job cutting out costs in its home entertainment division.”

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