As the businesses gets more and more competitive with margins getting crunched, companies are now focusing on cost controls measure and higher margin segments. The increase in operating cost are mainly due to growing man power cost and various other operating cost that provides negative impact on the bottom line. Companies that have various revenue segments are now more concentrating in the growth oriented segments rather than segments that eats up the profits. Lately, the entertainment and media industry is one such industry that has been greatly affected as the print media has be taken over by the digital media. Warner Bros (TMX, Financial), a global leader in media and entertainment industries is now focusing on investments in the growth segment and also letting off the segment that does not assist in gaining profits.
Quarter overview
In the second quarter for the fiscal 2014, the company recorded revenue growth by 3%, to record $6,788 million as compared to $6.608 million in the same quarter last year. Operating income was up by 17%, to record $1,576 million as compared to $1,387 million in the same quarter last year. The
Segmental revenue
| Segment |
Q2-2014 (Billion) |
Q2-2013 (Billion) |
Growth Decline |
| Turner | $2.75 billion | $2.62 | 5% (Up) |
| Home Box Office | $1.41 billion | $1.21 | 10%(Up) |
| Warner Bros | $2.87 billion | $2.94 | 2% (Down) |
Turner recorded growth with the increase in the subscription and advertisement. This was also leveraged with the increase in the rates in the domestic market, partly offset by foreign currency exchange rates.
Home Box Office (HBO), gained in subscription revenues mainly due to the higher domestic rates and consolidation of HBO Asia and HBO South Asia. Content revenues were also increased due to increase in price of selected program on “Amazon Prime Instant Video” that is licensed by HBO.
There not much major releases for the Warner Bros. as compared to some major hits in the same quarter last year. This was the main reason or marginal decrease in the revenue Warner Bros. Last year in the same quarter some major releases were Man of Steel, The Hangover Part III and The Great Gatsby which were mega success.
Reduced head count for strategic investment plans
The operating income of the company has witnessed growth, but still company wants to further increase the operating margin by cost cutting, which can be offset by various its new investment policy. In the start of the current month the news was aired that the company plans to reduce the head count at various levels of the organizations. This will be applicable to all division of the company, although it seems that the movie and TV production unit will have the least brunt of this strategic move. The management plans to reduce the head counts by 1000 which will have a major affect on the operating cost and can also have a positive impact on the operating margin. Furthermore, with this reduced head count, it can be more focused on the investments in various contents, with the prime objective to increase the output of the studio. So, with the reduced headcount and investment in content output the company can certainly generate more revenue with a controlled operating cost. It has been over 5 years since the company last implemented the major layoff. In 2009, the company had a layoff of 800 headcount.
“Since I became CEO, I’ve been working with the Studio’s senior management team to create a plan to position Warner Bros. for future growth,” Tsujihara told employees in his email. “This will require us to reduce costs and reallocate resources to our high-growth businesses.”
Spinoff to stay focused on digital content
In the second quarter, the company finalized the much awaited spinoff of Time Inc. (TIME). This spinoff can further influence the company growth in the future as it can now be more focused on the growth areas of the company. The digital media has been taking over the print media, and this can be one of the prime reasons why the company decided to finalize the much awaited spinoff deal of Time Inc. The stock for the company had declined on completion of spinoff, mainly due to the concern of decline in revenue after spinoff, but rebounded quickly. Time Warner was not yielding the anticipated profits for the company, mainly as the inclination of the customer for digital media was much higher as to the print media, and resulted in not so profitable segment for the company. So, now the management believes that it will be more focused completely on the TV networks and TV production business which are the main growth areas for the company
Payout
The company has been always safeguarding the interest of its investors, as it regularly declares dividends keeping the investors smiling. In the quarter, the company declared a dividend of $0.3175 per share which was sequentially flat over previous quarters. Furthermore the company also has been firm with its share repurchase programs. It repurchased 51 million shares that were worth $3.5 million. The repurchase program always leverages the EPS value of the share, and it grew by 29% year over year, to $0.98 per share. The company further has allocated $5.0 billion for its share repurchases programs that will further provide growth of EPS in future.
Conclusion
As we notice, the company is focused on the growth segment, and the spinoff will also have a positive impact on the profits of the company. The company also plans to invest more in digital content which again will generate higher revenue. The investment would not be an extra financial burden since it plans a layoff for around 1,000 head count, which means lesser recurring expense of manpower cost. So the company is moving on the right track for future growth and as an investor, I would certainly invest in it for long term growth.
