HBO Now launch costs exceed network's $21M revenue rise in Q2

Time Warner-owned premium network HBO saw its second-quarter revenues grow to almost $1.44 billion, up 1 percent, or $21 million, from $1.42 billion a year previously, thanks to increased subscriptions. But the cost of launching its new standalone OTT service, HBO Now, exceeded that revenue gain.

Higher marketing and technology costs for the new streaming service led to adjusted operating income of $508 million, down 8 percent, or $44 million, from the same period in 2014.

Analysts were not too concerned over HBO Now's effect on operating income, however.

"The launch of HBO NOW streaming service pressured margins, but the OI decline of -8 percent still resulted in ~$30M outperformance vs. our estimate," Evercore ISI Media analysts Vijay Jayant, David Joyce and Vikash Harlalka said in a market update. The analyst firm rated Time Warner as a "buy" with a target price of $91.

Time Warner did not disclose the number of subscribers to HBO Now, but stay tuned as "the company typically discloses HBO subscribers in their 10K," Evercore ISI's Jayant said.

A recent MoffettNathanson study estimated HBO Now to have somewhere between 970,000 and 1.9 million subscribers, based primarily on Apple iOS app usage figures provided by SensorTower. However, a BTIG study pegged those numbers lower, between 850,000 to 1 million subs, also based on iOS app download numbers.

But subscribers, and revenue for the OTT service, should continue to grow as HBO Now is past its exclusivity window for Apple and is gradually rolling out via broadband providers like Verizon (NYSE: VZ).

Overall, Time Warner topped analyst expectations for the quarter, The Wall Street Journal reported; analysts had predicted revenues of $6.9 billion and EPS of $1.03. Instead, overall revenue reached $7.35 billion, an 8.2 percent increase over the second quarter of 2014. Adjusted EPS (earnings per share) for Time Warner were $1.25, up from 98 cents the year previous, due to higher adjusted operating income and fewer outstanding shares, the company said in its earnings release.

Time Warner shares were down 3.75 percent in midmorning trading on the NYSE, to $84.39.

For more:
- see the earnings release
- WSJ has this article (sub. req.)

Related articles:
MoffettNathanson: HBO Now has as many as 1.9M subs, Sling TV has up to 200,000
HBO Now rolls to Verizon broadband customers with 30-day free trial as HBO signs on to Verizon mobile OTT service
Netflix, Showtime, HBO set OTT strategies in motion

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