Time Warner, rated 'BBB' with a Stable Outlook by Fitch,
announced today that its AOL unit will offer its software, email, and
many other products for free to broadband users. Fitch believes that
at the current rating the company has sufficient capacity to endure
potential near-term reduction in EBITDA and free cash flow.
While management disclosed today that it is not expecting any decline in its operating income before depreciation and amortization (OIBDA) measures as a result of this strategy, Fitch recognizes that management's expectations are dependant on its assumptions regarding the pace of churn on its dial-up subscriber base, the growth in advertising dollars and the swiftness of its cost reductions. Fitch believes that if management's assumptions prove to be overly optimistic, that at the current rating the consolidated entity could withstand a temporary, near-term drop in EBITDA with out having a material impact on the rating (all other risks being equal).
Fitch believes there are meaningful benefits to AOL's acceleration of the shift toward an advertising-supported business model. While this strategy will cannibalize existing narrow-band subscriber revenue; however, Fitch recognizes that these customers are being increasingly poached by competitors. AOL will have the ability to retain these customers (that are otherwise naturally migrating toward broadband) and monetize the significant engagement and loyalty that those customers have historically demonstrated with AOL content offerings. There is a degree of execution risk associated with this transition, but Fitch has stated previously that there is room at the existing rating level to absorb risks of this magnitude.
Overall, Fitch's ratings on Time Warner continue to reflect the company's strong and consistent free cash flow, solid credit protection measures, significant subscription based-revenue (at Time Warner Cable), leading market positions in core businesses, strong brands, and content and distribution network, in addition to sound liquidity. Concerns relate to the potential for additional shareholder friendly initiatives in light of the company's sluggish stock performance, as the company has been exposed to significant pressure from several large stakeholders to increase shareholder returns. The company has repurchased approximately $12 billion under its $20 billion authorization while the stock was down around 7% year to date through August 1. Rating concerns also include the company's exposure to cyclical advertising, which is less significant relative to industry peers. Other concerns relate to the inherent volatility of the filmed entertainment and television production businesses.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
While management disclosed today that it is not expecting any decline in its operating income before depreciation and amortization (OIBDA) measures as a result of this strategy, Fitch recognizes that management's expectations are dependant on its assumptions regarding the pace of churn on its dial-up subscriber base, the growth in advertising dollars and the swiftness of its cost reductions. Fitch believes that if management's assumptions prove to be overly optimistic, that at the current rating the consolidated entity could withstand a temporary, near-term drop in EBITDA with out having a material impact on the rating (all other risks being equal).
Fitch believes there are meaningful benefits to AOL's acceleration of the shift toward an advertising-supported business model. While this strategy will cannibalize existing narrow-band subscriber revenue; however, Fitch recognizes that these customers are being increasingly poached by competitors. AOL will have the ability to retain these customers (that are otherwise naturally migrating toward broadband) and monetize the significant engagement and loyalty that those customers have historically demonstrated with AOL content offerings. There is a degree of execution risk associated with this transition, but Fitch has stated previously that there is room at the existing rating level to absorb risks of this magnitude.
Overall, Fitch's ratings on Time Warner continue to reflect the company's strong and consistent free cash flow, solid credit protection measures, significant subscription based-revenue (at Time Warner Cable), leading market positions in core businesses, strong brands, and content and distribution network, in addition to sound liquidity. Concerns relate to the potential for additional shareholder friendly initiatives in light of the company's sluggish stock performance, as the company has been exposed to significant pressure from several large stakeholders to increase shareholder returns. The company has repurchased approximately $12 billion under its $20 billion authorization while the stock was down around 7% year to date through August 1. Rating concerns also include the company's exposure to cyclical advertising, which is less significant relative to industry peers. Other concerns relate to the inherent volatility of the filmed entertainment and television production businesses.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.