Why Time Warner Is Aggressively Plowing Ahead With More Job Cuts

Updated from 12:35 p.m. EST with analysis from S&P Capital IQ. 

NEW YORK (TheStreet) -- Time Warner  (TWX)  keeps cutting staff as CEO Jeff Bewkes tries to cut costs and streamline operations to appease shareholders eager for higher profits, and a higher stock price. Shares jumped 1.1% to $77.73.

Bewkes' ability to deliver on profits is being more closely scrutinized after he successfully rebuffed 21st Century Fox's (FOXA) buyout offer three months ago. Warner Bros. Entertainment, Time Warner's movie studio arm, plans to cut as much as 10% of its 9,000-strong workforce, according to an initial report on the job cuts from the Hollywood publication Variety.

Time Warner, though, was quick to temper Variety's job cut numbers. Warner Bros.' spokesperson Paul McGuire countered in an email that "there is no headcount target. Plans are still in process." 

Nonetheless, it appears that those layoff plans have been on the agenda for more than a year, a source familiar with the matter told TheStreet. Time Warner's rejection of Fox's $80 billion takeover offer has expedited the layoff process, and investors are pressuring executives for moves that can push the stock to the levels shares traded before Murdoch pulled his $85 per share offer on Aug. 6. On July 21, Time Warner reached a high of $87.36. 

Management is being told by shareholders that it needs to get the stock above $85, Morningstar analyst Neil Macker said in a phone interview. "Management is right-siding the company to reach those goals," Macker said.

"They're under more pressure to demonstrate sustainable profitability," added S&P Capital IQ analyst Tuna Amobi. 

In early September, Warner Bros.' CEO Kevin Tsujihara issued a memo to employees warning of job cuts executed indiscriminately on every level. "It pains me to say this, positions will be eliminated -- at every level -- across the Studio," he wrote.

However, Macker believes the bulk of those cuts will be focused on divisions such as home entertainment and distribution, the areas outside of operations directly involved with content production. The New York-based media conglomerate has been reshaping itself as a content company ever since it spun off its cable operations in 2009 and magazine business earlier this year. Now the company's crown jewels are its movie studio (responsible for Godzilla and The LEGO Movie), cable channel HBO, and broadcast networks such as CNN and TNT.

The refocus on production is in response to the shifting economics of Hollywood, with content now seen as a more valuable commodity with the benefit of recurring revenue if a library can be monetized. "If you're a media company, that's where your value is going to come from," said Macker.

This could also be Bewkes' attempt to leave his mark on the company in his sixth year since taking on his position as CEO, noted Amobi. This could be the "kind of action he needs to take to get some credibility, not just on Wall Street, but within the company itself," he said. 

The film and TV production industry as a whole has seen profit margins squeezed, a product of lower ratings, higher programming costs and softer-than-expected box office turnout. Margins among TV broadcast hover around 19%, with film and TV production at 12%, according to a recent study from Ernst & Young. Both industries are far below the S&P 500 profit average of 28% for entertainment and media companies and dwarfed by an approximate 41% for cable operators.

Even without job cuts, overall profitability at Warner Bros. has been on the upswing, though. Over the first half of the year, operating income at the studio jumped 35.8%, while gross margins climbed 210 basis points to 10%. Much of the growth was due to the box-office success of The LEGO Movie and DVD sales of The Hobbit: The Desolation of Smaug.

Warner Bros.' sister division Turner Broadcasting has also been victim to job cuts, with as many as 600 employees, around 6% of the unit, offered buyouts in late August. The CNN property was recently valued at $5 billion after Fox assessed its sale to avoid antitrust issues in the bid for Time Warner (given Fox owns cable news network Fox News). Profits at Turner Broadcasting rose 9.8% over the six months to June 30, while gross margins edged up to 34% from 32.7%.

Strategic plans and financial goals will likely be elaborated upon at Time Warner's investor day on an as-yet-unconfirmed date in the fall, said Amobi. 

--Written by Keris Alison Lahiff in New York.

More from Stocks

Jim Cramer: Schlumberger Predicted the Rise in Oil Prices

Jim Cramer: Schlumberger Predicted the Rise in Oil Prices

Jim Cramer on Zillow's New Business: Buying and Selling Homes

Jim Cramer on Zillow's New Business: Buying and Selling Homes

Jim Cramer: Wabtec Deal Gives General Electric Optionality

Jim Cramer: Wabtec Deal Gives General Electric Optionality

Jim Cramer on the Markets: It's Natural to Have Some Profit Taking

Jim Cramer on the Markets: It's Natural to Have Some Profit Taking

Video: Jim Cramer on the Markets, Oil, General Electric, Zillow and Micron

Video: Jim Cramer on the Markets, Oil, General Electric, Zillow and Micron