Time Warner Still Loves the Cable-TV Bundle Despite Dish Dispute

NEW YORK (TheStreet) -- Time Warner is making the case that it doesn't need 21st Century Fox (FOX)  and isn't worried much about declining TV advertising. That's because the owner of HBO, TBS and CNN is getting higher and higher fees from cable- and satellite-TV providers both in the U.S. and internationally.

Shares of Time Warner were climbing 3.4% to $77.53 on Wednesday, extending its 2014 gain to 11.2% compared to a 9.3% advance for the S&P 500.

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Watch the video below for a look at Time Warner's latest quarterly results:

These so-called affiliate fees have increased through the first three quarters of 2014, gaining 7% to 8% to 10%. Yes, total advertising fell 2% for the three-month period ended Sept. 30 compared to the same period a year ago with domestic ad-sales little changed. Ratings have "remained a headwind," acknowledged finance chief Howard Averill, and audience numbers for October "seem to be getting worse, not better," down 15% compared to the same period a year ago, wrote Bernstein Research media analyst Todd Juenger on Wednesday. 

But as Time Warner has renegotiated contract with Comcast (CMCSA) , Time Warner Cable (TWC) and others, advertising has less of an effect on operations.

"Going forward, the drop in advertising is just not a big deal for them because their revenue is driven by affiliate revenue," said Vasily Karasyov, media analyst at Sterne Agee in a phone interview from New York. "Advertising is less of a factor."

Like its media brethren at Fox and Discovery Communications (DISCA) , Time Warner's television networks are experiencing a decline in advertising. But unlike Discovery, which depends on global advertising for more than half of its revenue, the slippage in TV advertising isn't significant enough to have a meaningful impact on Time Warner's earnings. Time Warner gets about 60% of its revenue from its television channels, the bulk of that from affiliate fees.

Fact is that Time Warner makes most of its money from cable- and satellite-TV providers around the world who pay to carry its many networks. And that comes even as Time Warner remains in a contract dispute with Dish Network, whose chief executive, Charlie Ergen on Tuesday called his decision to remove CNN, the Cartoon Network and TruTV on Oct. 21 a "non-event." Dish's contract with TBS and TNT is set to expire later this year.

"We disagreed with virtually everything [Ergen] said," Turner Broadcasting CEO John Martin said on Wednesday in a conference call with investors. "It's unclear what the dispute with Dish is." Martin countered that Time Warner has been supportive of Dish's efforts to start a standalone digital service, adding that "we're working hard to get a deal done."

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The Dish dispute could effect profits for the current quarter, Averill said. Time Warner did raise its full-year forecast for adjusted profit to rise by a "high teens" percentage for 2014, an increase from its August forecast of a "low teens" percentage increase. Working off a base of $3.51 a share in 2013, analysts' average estimate calls for Time Warner to earn $4.01 a share for 2014, a 14% jump. If the Dish dispute worsens, Averill said Time Warner's net income would come in at the lower-end of its forecast.

But the Dish dipute aside, much of Time Warner's gains over the past month is the result of convincing investors that it has a plan to counter the creeping decline in television advertising. To much fanfare, Bewkes last month gave HBO the green light to offer a standalone digital service, thereby countering Netflix (NFLX) but also attracting some of the 10 million homes that pay for a broadband connection but elect not to subscribe to cable TV.

As for that $85 billion takeover offer from Fox, Time Warner (TWX) is now trading at $6.50 above the price where it stood a day before Fox Chairman Rupert Murdoch offered to buy Time Warner for $85 a share, a less-than-friendly proposal made public on July 16. Following the offer, shares traded up as high as $87.36 on July 21 before tumbling down to $70.64 on Oct. 13, at which point investors made rumbling sounds that maybe Time Warner CEO Jeff Bewkes should think about retirement.

But that's ancient history. Time Warner shares aren't at Murdoch buyout levels but they're still higher than before the offer. Bewkes' argument that Time Warner is better off as currently constructed is winning the day, at least for now. Time Warner reported profit excluding some costs of 97 cents per share, beating a 94 cents consensus estimate among Wall Street analysts.

Revenue increased 3.3% to $6.24 billion for the quarter, also beating a forecast of $6.16 billion.

"At a time when a lot of companies have shown to have downside risk on earnings, these guys really don't," Karasyov added. "Right now, Time Warner is a good earnings growth story."

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Written by Leon Lazaroff in New York

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Follow @LeonLazaroff

Leon Lazaroff is TheStreet's deputy managing editor.

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