Time Warner Q1 profit falls but eyes on global expansion

By Ryan Nakashima, Gaea News Network
Wednesday, April 29, 2009

timewarnerTime Warner 1Q profit falls on cable spin

LOS ANGELES — Time Warner Inc. said Wednesday that its first-quarter profit fell 14 percent on charges related to its cable unit spin-off. Amid an ad slump, the media conglomerate reaffirmed its guidance on flat profits for the full year. The company also moved further toward shedding the beleaguered Internet unit AOL, while suggesting that its Time Inc. magazine business may go some day.

Reflecting on double-digit declines in Internet and magazine advertising, Chief Executive Jeffrey Bewkes said Time Warner’s future “may well include publishing,” but noted “we’re not making a religious statement about it either way at this point.”

Bewkes said Time Warner’s future will focus more on the global expansion of its networks such as CNN and HBO and its TV show and movie productions led by the Warner Bros. studio.

“It’s growing around the world,” he told analysts during a conference call. “It’s growing due to digital.”  The New York-based company also announced Wednesday that it has notified Google Inc. of its intentions to buy back the Internet search leader’s 5 percent stake in AOL. Google, based in Mountain View, paid $1 billion for the stake in 2006, but recently wrote off $726 million of it. In January, it exercised its right to request its stake be sold to the public. Time Warner has the right to buy it back and the company said Wednesday it is moving down that path.

“The next step in the process is an independent valuation of AOL and the process will likely take a few months,” Chief Financial Officer John Martin said.

After the results were announced, shares in Time Warner were up 21 cents, or 1 percent, to close Wednesday at $21.98.

Time Warner earned $661 million, or 55 cents per share, for the period ended March 31, down from year-ago net income of $771 million, or 64 cents per share.

Those results included $106 million in after-tax profits from discontinued operations, including Time Warner Cable Inc., which it spun off March 12. Last year, those discontinued operations amounted to $223 million.

Excluding discontinued operations and other one-time items, earnings from continuing operations were $545 million, or 45 cents per share, down from $582 million, or 48 cents per share.

That’s better than the 38 cents per share that analysts surveyed by Thomson Reuters predicted. Analysts’ estimates typically exclude one-time items.

Quarterly results reflect a 1-for-3 reverse stock split.

Martin said the company managed to reduce operating expenses in the quarter by about 7 percent, or $400 million.

Revenue from continuing operations dropped 7 percent to $6.95 billion from $7.47 billion. Aside from the pressures of its AOL and publishing units, the company said lower DVD sales at its filmed entertainment division also squeezed results.

Analysts expected revenue of $6.78 billion.

Revenue at the Time Inc. publishing division, which includes such magazines as Time, Sports Illustrated and People, sagged 23 percent to $806 million mostly on a 30 percent decline in ad sales.

Bewkes said some of the magazine advertising revenue may be gone for good.

“We aren’t assuming that this is all cyclical and will automatically come back when the economy turns,” he said. Expecting further closures in the industry, he added, “There will probably be a further shakeout.”

At AOL, ad sales slipped 20 percent and subscription revenue fell 27 percent; total revenue was down 23 percent to $867 million. The number of AOL subscribers continued to fall in the quarter, a drop of 570,000 accounts to 6.3 million, with free e-mail and other free services taking a bite out of membership.

In 2006, AOL accelerated its efforts to give away most of its services to drive traffic to its free, ad-supported Web sites. But after a few strong quarters, ad growth ultimately slowed down and then reversed, putting pressure on the company to get rid of AOL and undo AOL’s ill-fated $106 billion purchase of Time Warner in 2001.

Last month, AOL tapped former Google executive Tim Armstrong to become its chief executive in the hopes he would be able to turn around the Internet division. Armstrong replaced former NBC executive Randy Falco and started three weeks ago. Time Warner also has been separating AOL’s Internet access operations from its Web site and advertising businesses to make a sale of either part more appealing.

“Now they’ve got all the pieces in place to do the spin-off,” Barrington Research analyst James Goss said.

He predicted the company will shed AOL as it did Time Warner Cable, with shareholders owning pieces of both companies.

“They don’t want to do a poor job at this stage after showing the patience to go through all this,” he said.

Revenue for the filmed entertainment unit fell 7 percent to $2.6 billion with DVD sales declining on fewer home video releases, the stronger dollar, lower movie theater revenue and a drop in catalog sales. The quarter captured theatrical revenue from the release of “Watchmen” and the tail end of “Gran Torino” but had only five key releases on home video, including “Body of Lies,” compared with 13 last year, led by “I Am Legend.”

The company also said the credit crunch led to a partner not being able to cover its 50 percent funding of four films in 2008, a shortfall totaling about $120 million. Warner Bros. is temporarily covering the expense, but company expects to recoup the costs. The films are accounted for as being wholly owned for now.

At the networks division, which houses HBO and Turner Broadcasting, revenue rose 6 percent to $2.8 billion. Increased rates at the two cable outlets and the consolidation of HBO Latin American Group helped boost subscription revenue, but those results were somewhat offset by a 2 percent drop in ad sales.

Although Time Warner Cable did not contribute to revenue results, it did help lower its former parent company’s debt load. Time Warner sliced its net debt to $10.4 billion from $20.7 billion at the end of 2008, primarily because Time Warner Cable’s spin-off resulted in a one-time dividend payout of $9.25 billion to Time Warner.

Separately, Time Warner Cable said Wednesday that its first-quarter profit fell 32 percent to $164 million on restructuring and other costs related to its spin-off, despite a boost in sales.

The spin-off of Time Warner Cable is expected to help the former parent company concentrate on its strengths in content.

Time Warner still expects 2009 adjusted earnings to be about flat with a year ago, which comes out to $1.98 per share. The forecast accounts for the stock split as well as the Time Warner Cable spin-off.

Analysts forecast profit of $1.96 per share.

AP Business Writer Michelle Chapman contributed to this report from New York.

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