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Time Warner Reports $1 Billion 2Q Profit

Posted on: Wednesday, 2 August 2006, 15:00 CDT

By SETH SUTEL

NEW YORK - Time Warner Inc., the world's largest media company, reported a $1 billion profit for its second quarter Wednesday and said it would revamp its AOL business to offer many services such as e-mail for free.

The company's shares rose after it said the much-anticipated revamp wouldn't hurt earnings this year as AOL slashes costs for marketing its dial-up service even as subscribers continue to leave.

Jeff Bewkes, Time Warner's chief operating officer, told analysts on a conference call that any expectation that the revamp would require a "hit" to AOL earnings "is not right."

The profit contrasted to a loss of $409 million in the same period a year ago, when the company recorded a charge for settling securities litigation. Strength in cable TV and filmed entertainment offset weakness at AOL, which lost nearly 1 million subscribers in the quarter.

The company, whose properties also include HBO, Warner Bros. and the Time Inc. magazine publisher, earned 24 cents per share in the April-June period versus a loss of 9 cents per share a year ago.

Excluding one-time items, the earnings were equivalent to 20 cents per share in the most recent period, a penny better than analysts polled by Thomson Financial had been expecting. On a similar basis, the year-ago earnings were 16 cents per share.

Time Warner also said the AOL revamp, which had been expected, wouldn't hurt its earnings this year, helping to allay investor concerns about the impact of the plan.

Time Warner's shares rebounded 53 cents, or 3.3 percent, to $16.78 in afternoon trading on the New York Stock Exchange. However, they were still below the $17.13 level they closed at on July 5, the day before The Wall Street Journal first reported that the revamp was in the works.

Revenues edged up 1 percent to $10.7 billion from $10.6 billion.

On an operating basis, income before depreciation and amortization rose 7 percent to $2.7 billion as gains in cable TV, cable networks and filmed entertainment offset weaker results at AOL and magazine publishing.

In the year-ago period, the company took a $3 billion charge for legal reserves related to settling securities litigation in the wake of the sharp tumble in the company's share price following AOL's deal in 2000 to buy Time Warner.

Separately, the company also announced changes in its AOL division, saying it would make its software, e-mail and other parts of the service free to high-speed Internet users, but no longer aggressively market its dial-up subscription service.

The move is part of AOL's strategy to refocus on the booming area of online advertising and shift away from dial-up Internet access subscriptions, which are declining. By allowing AOL members to continue to use the service for free after switching to broadband, "we will finally position AOL to take advantage of very compelling online trends," Time Warner CEO Richard Parsons told analysts on a conference call.

In a note to clients, Merrill Lynch analyst Jessica Reif Cohen said that the AOL restructuring, which is expected to get underway next month, "remains the most important catalyst" for the company, "but it remains uncertain if the new strategy will be successful in driving advertising growth."

In its quarterly regulatory filing, which was also made Wednesday, the company said it expected to reach a deal to sell the Internet access services of its AOL Europe unit in the second half of this year.

Time Warner said it had completed more than half of its $20 billion share buyback program announced last year, paying about $11.7 billion since the program started to buy 14 percent of its outstanding shares.

The AOL division posted a 2 percent decline in revenues and a 4 percent fall in profits as it continued to lose dialup subscribers, offset partly by more gains in advertising. The quarter also included $15 million in charges to close one customer service center and scale back another. As of the end of the quarter, AOL's subscriber rolls fell 976,000 to 17.7 million. Time Warner said in its regulatory filing that it expects a faster rate of decline in its subscribers, as well as a corresponding decline in both subscription revenues and network costs.

Time Warner's cable TV business, the second largest in the country after Comcast Corp., recorded a 15 percent gain in revenues and a 16 percent rise in profits on more growth in premium services like highspeed Internet, digital phone and digital video. This week Time Warner Cable closed a deal to acquire, together with Comcast, the cable systems of Adelphia Communications Corp.

Time Warner said the additional cable systems would add several percentage points to its full-year growth rate in operating profits, which is now expected to be in the low double-digit percentage range, off a base of $10 billion last year - a figure that was adjusted to reflect the sale of its book publishing division. That rate also accounts for the consolidation of Court TV and the shutdown of the struggling WB network.

The company's movie and TV studios - Warner Bros. and New Line Cinema - posted a 10 percent decline in revenues on lower home video sales and other factors. Profits rose 10 percent on lower costs as well as contributions from syndication sales of "Seinfeld" and "Without a Trace."

Time Inc., a major magazine publisher that puts out Time, Sports Illustrated, People, Money and many other titles, turned in a 2 percent decline in revenues and an 11 percent fall in profits.

Revenues and profits from cable TV networks both rose 9 percent, partly as a result of the consolidation of Court TV, a network it had half-owned with Liberty Media Corp.

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On the Net:

http://www.timewarner.com

Source: Associated Press/AP Online

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