Digital Media

Helped by cost cuts and by growth in Internet and phone subscribers, Comcast on Wednesday reported a 22 percent jump in earnings for its third quarter.

The cable provider saw net income of $944 million, or 33 cents per share, for the quarter ended Sept. 30, compared with $771 million (26 cents per share) in the year-ago quarter. Sales also rose, hitting $8.8 billion, up from $8.5 billion in 2008's third quarter, though revenue was slightly below analysts' estimates.

Comcast's third-quarter sales

(Credit: Comcast)

For the quarter, the number of TV subscribers dropped 2.7 percent to 23.7 million from 24.4 million a year ago. But the loss was more than offset by gains in Internet and voice, two services that Comcast has marketed heavily, especially as part of its Triple-Play service.

The number of Internet subscribers rose 6.4 percent to 15.6 million, while Comcast phone customers jumped 20 percent to 7.3 million. Overall, the company saw a quarterly increase in customers of 3.4 percent to 46.8 million. Subscriber growth helped boost third-quarter sales for the cable segment by 2.8 percent to $8.4 billion.

Comcast Internet and voice customers grow.

(Credit: Comcast)

With a focus on trimming costs, capital expenses declined 6.1 percent to $1.2 billion, due in large part to lower spending at the company's cable divison.

"The strength and resilience of our businesses combined with our continued emphasis on expenses and prudent capital management helped us achieve healthy operating and financial results in the third quarter," Brian Roberts, chairman and chief executive officer, said in a statement.

Comcast revealed no new details over its intent to acquire a leading stake in GE-owned NBC Universal. Early last month, reports surfaced that the company wanted to buy a 51 percent chunk of NBCU, with GE owning the rest, to create a new joint venture. If it goes through, the deal could transform Comcast into a major media powerhouse, with control of NBC as well as variety of TV networks and cable stations.

You wouldn't know there's been a slowdown in consumer spending by looking at Amazon.com and Netflix.

Both companies have continued to grab customers at a record pace, leading to higher earnings and sales for their third quarters.

Net income for Amazon jumped 68 percent to $199 million, or 45 cents a share, in the quarter that ended September 30, compared with $118 million, or 27 cents a share, in the prior year's quarter.

Sales rose 28 percent to $5.45 billion versus $4.26 billion in 2008's third quarter, the company said Thursday.

Amazon's stock shot up $23.75, or 25 percent, to $117.29 in Friday trading.

Amazon's two-year stock chart.

(Credit: Yahoo Finance)

Amazon attributed its earnings to several key factors.

Chief Financial Officer Tom Szkutak said Thursday in a conference call with reporters that consumers continue to spend at Amazon because of its low prices and large selection. The company noted that it had 98 million customer accounts by the end of the third quarter, 17 percent higher than a year ago.

Worldwide sales from books, CDs, DVDs, and other media grew 17 percent to $2.93 billion, while revenue for electronics and other general merchandise soared 44 percent to $2.36 billion.

Another solid driver for growth was the Amazon e-book reader, Kindle.

"Kindle has become the No. 1 bestselling item by both unit sales and dollars--not just in our electronics store but across all product categories on Amazon.com," Amazon CEO Jeff Bezos said in a statement. The company did not release specific sales figures for the Kindle.

Amazon managed to clobber analysts' expectations. J.P. Morgan had forecast earnings per share of 31 cents on sales of $5 billion. Broadpoint.Gleacher analyst Ben Schachter had been eyeing earnings per share of 33 cents and said that sales were 7 percent higher than he expected.

In a report, J.P. Morgan said Amazon's strong sales growth shows that the company is grabbing significant market share from other e-commerce players, such as eBay.

In his report, Schachter called the results "phenomenal." He noted that Amazon was able to keep its costs in check while gaining market share in virtually every product category. The analyst also said he was "shocked" to hear Bezos' statement that the Kindle has become the company's top-selling item.

For the current quarter, Amazon is looking for sales of $8.13 billion to $9.13 billion, 21 to 36 percent higher than last year's fourth quarter, and racing past analysts' estimates of $8.11 billion.

Collins Stewart analyst Sandeep Aggarwal said in a report that improving e-commerce trends and continued growth for the Kindle, among other factors, could make Amazon the fastest growing large-cap Internet stock.

Another beneficiary of solid customer growth, Netflix also surpassed analysts' expectations for the third quarter.

The company's earnings jumped 48 percent to $30.1 million, or 52 cents a share, versus $20.4 million, or 33 cents a share in the prior year's quarter. Sales grew 24 percent to $423.1 million, compared with $341.3 million in 2008's third quarter.

Overall, analysts had been expecting earnings of 46 cents per share on sales of $420 million.

Growth in subscribers was the key driver for Netflix in the third quarter. The company ended the quarter with around 11.11 million subscribers, a 28 percent jump from the 8.67 million subscribers at the end of 2008's third quarter. Of the current total, 98 percent, or 10.84 million, were paid subscribers, while the remaining 2 percent were free subscribers.

"Our business momentum is strong and our third quarter performance keeps us solidly on course for a record 2009," Netflix co-founder and Chief Executive Officer Reed Hastings, said in a statement.

Though most Netflix customers still prefer to get their movies by conventional mail, Internet streaming has gradually taken off. In the third quarter, 42 percent of Netflix subscribers streamed at least 15 minutes of video, compared with only 22 percent in the prior year's quarter.

Customers can stream their Netflix picks not just through the PC but via gadgets like Microsoft's Xbox 360, which has helped attract new customers.

Now Netflix has reportedly struck a deal to add streaming to another device, which Hastings said is already in people's homes. Though the company has been mum about details, analysts believe it may be a video game console made by either Sony or Nintendo.

Netflix shares were up $4.58, or 9 percent, to $54.22 on Friday.

For the fourth quarter, the company believes customer growth and sales will be higher than anticipated three months ago. Netflix now expects to end the current quarter with 12 million to 12.3 million subscribers, up from the prior estimate of 11.6 million to 12 million. That would represent an additional 900,000 to 1.2 million customers.

Fourth-quarter sales are likely to reach $440 million to $446 million, up from the previous estimate of $431 million to $445 million.

However, the company forecasts a downturn in earnings from the third quarter, eyeing fourth-quarter net income of $21 million to $26 million, or 38 cents to 47 cents a share.

Expenses may be one factor affecting current earnings. Hastings said the company expects to spend more on marketing and licensing fees for Internet streaming. Netflix also believes its postal costs will continue to grow, surpassing $600 million next year and $700 million in 2011.

This was originally posted at ZDNet's Between the Lines.

Time Warner's AOL, which is set to be spun off "around the end of the year," had a rocky second quarter as revenue fell 24 percent from a year ago amid a weak advertising market.

According to Time Warner's second-quarter release, AOL saw revenue skid 24 percent to $804 million for the three months ended June 30. Operating income fell 28 percent to $165 million. AOL and Time Warner filed documents detailing the spin-off plans on Monday.

By the numbers:

• AOL's subscription revenue fell 27 percent as the company lost 510,000 dial-up subscribers to end the quarter with 5.8 million customers.

• AOL's ad business fell 21 percent due to lower ad network, display, and paid-search revenue.

• The unit had 107 million average monthly unique visitors and 51 billion U.S. page views.

Overall, Time Warner reported second-quarter net income of $519 million, or 43 cents a share, on revenue of $6.81 billion, down 8.8 percent from a year ago. Time Warner presented its results to account for the spin-off of Time Warner Cable. Wall Street was expecting earnings of 37 cents a share.

Here's a snapshot of Time Warner's revenue picture overall:

(Credit: Larry Dignan/ZDNet )

Netflix reported strong earnings after the bell on Thursday that outpaced analyst expectations, proving once again that a down economy can't slow the Web's top movie rental service.

For the company's second quarter ended June 30, Netflix saw net income of $32 million on revenue of $408.4 million, a 21 percent increase in revenue from the same quarter last year.

The Los Gatos, Calif.,-based company paid investors 54 cents per diluted share compared to 42 cents a diluted share a year ago. Analysts on average had expected the company to report 50 cents a share and $410 million in revenue.

The number of Netflix's subscribers grew to 10.6 million, a 26 percent jump year over year.

Netflix adjusted its revenue outlook for the year and said revenue would come in between $1.65 billion and $1.67 billion instead of $1.63 billion and $1.67 billion. The company projected net income would be $99 million to $109 million, up from $96 million to $106 million.

On Thursday, shares of Netflix closed at $46.46, up 2 percent. In after-hours trading, the company's stock was up slightly to $47.70.

More to come

Yahoo beat analyst estimates with a second-quarter profit of $141.4 million, or 10 cents a share, but its revenue dropped 13 percent from a year ago to $1.57 billion as search ad revenue declined from the first quarter.

Yahoo Chief Executive Carol Bartz said in a conference call that she was pleased with the results. "We're seeing less fear in the marketplace," she said, adding that the economy is "bumping along the bottom."

Bartz said Yahoo did a great job controlling costs and plans to ramp up spending on priority areas such as engineering, repositioning the company's brand with marketing, improving the efficiency of its advertising platform and getting rid of irritating and high-frequency ads that cheapen the Yahoo brand. The company expects the initiatives "to take $75 million in revenue out of our quarterly baseline," she said.

Yahoo saw strong demand from large advertisers for display ads and page views were up 7 percent, said Tim Morse, the new chief financial officer. "This is an encouraging sign, but we remain cautious about the economic environment overall," he said during the conference call.

Asked if the economy or ad sales have hit bottom yet, Morse told CNET News that seven of 10 different industry sectors in display advertising were up sequentially while all 10 categories were down in search. "It's too tough for us to tell," he said. "We're seeing a mixed bag in our results."

Analysts on the call expressed concern that revenue per search was down significantly compared with the first quarter and counter to what Google reported last week in its financial results.

Bartz said she didn't think it was a meaningful trend and noted that search volume was healthy. "What we're looking for is if we can increase our audience, which we know we can, we're going to drive both display and search revenue," she said.

Ross Sandler of RBC Capital Markets Corp. wasn't convinced. Executives gave a "macro environment rationale, where advertisers are seeing lower conversion rates and bidding less for fewer keywords and less per click than they were even a quarter ago," he said in an interview after the call. "The economy has got something to do with it but it still shouldn't have fallen off the cliff like that."

If not for the impact of currency rate fluctuations, revenue for the quarter ended June 30 would have declined only 8 percent from a year ago, Yahoo said.

Net income per share for the quarter compared with $131.2 million, or 9 cents per share, for the same period a year ago. Analysts on average were expecting income of 8 cents per share on revenue of $1.14 billion.

Yahoo's profitability improved in the second quarter, but revenue declined from a year earlier. This chart shows revenue minus TAC, commissions called traffic acquisition costs paid to advertising partners.

(Credit: Yahoo)

In addition to the currency issue, total revenue was reduced by the sale of Kelkoo late last year and lower fee revenue from voice over Internet Protocol, or VoIP, services, as well as subscription music offerings. Excluding the effects of these items, revenue would have declined 6 percent from a year ago.

Meanwhile, search advertising revenue dropped 15 percent, and display advertising revenue was down 14 percent. Total marketing services revenue declined 13 percent, and fee revenue was down 8 percent.

However, in after-hours trading, Yahoo's stock dropped 75 cents, or about 4 percent, to $16 per share.

Yahoo launched a new home page earlier Tuesday. The company also announced a deal with AT&T under which the telecommunications company will sell Yahoo display ads to local businesses in the United States, starting later this summer.

Yahoo recorded a $65 million net restructuring charge related to real estate, property, and equipment write-offs, personnel severance, and costs offset by a reversal of stock-based compensation expense for forfeited awards.

For the third quarter, Yahoo said it expects revenue between $1.45 billion and $1.55 billion.

The financial results come amid rumors that Yahoo is in renewed talks with Microsoft on a search ad deal. All Things Digital reports that a deal is imminent.

Asked by an analyst on the conference call about Microsoft's new Bing search project, Bartz said it was a good product. "I think Microsoft should be given kudos for Bing," she said. "I think they've done a good job."

Yahoo has 19.6 percent share in the search market, while Google has 65 percent and Microsoft has 8.4 percent share, according to ComScore.

Updated 3:58 p.m. PDT with background, quotes from conference call, and interview.

In what could be a positive sign for online advertising, Google said on Thursday that its second-quarter revenue rose from a year ago as ad spending in certain areas recovered and the company did well at managing expenses.

In what it termed "a very good quarter," Google posted revenue of $4.07 billion for the second quarter, excluding commissions paid to advertisers, up from a year ago and a smidge higher than analyst estimates.

In a conference call, Google Chief Executive Eric Schmidt said he was very pleased with the results the company posted as the economy struggles to recover. "It demonstrates our resilience in what continues to be a very difficult environment," he said. "Google's business appears to have stabilized," as consumers turned to the Web to find the best deals and ad sales were strong.

Schmidt said he couldn't forecast when the economy would improve.

"It's too early for us to tell when the recovery will materialize...A quarter ago, we had no idea where the bottom was," he said. "It became clear starting roughly at Christmas that people were spending more time searching and when they were purchasing products they were purchasing products of less value."

Ad spending, meanwhile, is returning, particularly in verticals such as shopping and travel, but not for financial companies yet. "We're not, at the moment, looking at the downward spiral we thought we would see six months ago," he said.

Revenue for the quarter ended June 30 was $5.52 billion, including traffic acquisition costs, up 3 percent from a year go. Traffic acquisition costs paid to advertisers were $1.45 billion, representing 27 percent of ad revenues. Excluding those commission, net revenue was $4.1 billion.

Net income was $1.48 billion, or earnings per share of $4.66, compared to $1.25 billion and $3.92 a share, a year ago. Excluding certain items, Google's earnings were $5.36 a share.

On average, analysts surveyed by Thomson Reuters had expected revenue excluding commissions to be $4.06 billion and earnings per share of $5.09.

The second quarter is typically a slower quarter because of reduced business activity during the summer, said Chief Financial Officer Patrick Pichette.

Aggregate paid clicks on ads served by Google rose 15 percent from a year ago, but were down 2 percent from the first quarter, while the average cost-per-click dropped 13 percent from a year ago and rose 5 percent from the first quarter. Traffic acquisition costs, or advertiser commissions, were down from a year ago.

The company has 65 percent of the search market, according to ComScore, followed by Yahoo with 19.6 percent, and Microsoft with 8.4 percent.

YouTube is starting to pay off, according to Nikesh Arora, president of global sales operations and business development. Google is making money off billions of videos every month, with monetizable views tripling from a year ago, he said.

"We're really pleased with the trajectory" and revenue growth (for YouTube), he said. "And in the (near) future, we see profitable business."

Google has about 20,000 full-time employees, down 375 from the end of the first quarter, mostly from a reduction in sales and marketing positions that was announced last quarter, Pichette said.

Google's revenue figures apparently didn't please Wall Street--Google's shares were down nearly 3 percent in after-hours trade, to $429.65.

This post was updated at 2:30 p.m. PDT with more details and at 2 p.m. PDT with comments from company's conference call.

Adobe Systems announced lower second-quarter earnings and sales on Tuesday.

Income dropped 41 percent to $126.1 million, or 24 cents per share, from $214.9 million, or 40 cents per share, a year ago. Sales fell 21 percent to $704.7 million from $886.9 million in 2008's second quarter.

Results were actually in line with or slightly above estimates. Analysts surveyed by Thomson Reuters expected even lower sales of $694.8 million. Excluding the cost of special items, second-quarter earnings hit 35 cents a share, meeting analysts' expectations.

Adobe CEO Shantanu Narayen was upbeat about the quarterly performance.

"We are pleased with the solid profit margin and earnings results we were able to deliver in Q2," said Narayen. "We continue to invest in our key business initiatives which will drive long-term revenue growth once the economy improves."

For the third quarter, Adobe is forecasting sales of $665 million to $715 million with earnings of 20 cents to 27 cents per share, or 30 cents to 37 cents a share excluding special items.

Adobe typically counts on strong revenue from its Creative Suite line of products. But sales of the newest CS4 edition have been weak. The product was released late last year just as the recession was kicking into high gear.

Adobe has been moving to improve performance by cutting costs and introducing new products. In December the company said it would trim about 600 jobs. This week Adobe announced it's bringing its new business-class Acrobat.com PDF conversion site out of beta.

Investments made in Web music services Lala, Imeem, and MySpace Music haven't paid off for Warner Music Group, at least not yet.

The third largest of the four biggest recording companies said Thursday it would write down $33 million, most of it from investments made in Lala and Imeem. Edgar Bronfman Jr., Warner Music's CEO, also said after the company issued quarterly earnings report that MySpace Music's performance has so far "disappointed."

Warner Music's write down--$16 million in Imeem and about $11 million in Lala--is a reflection of the company's valuations during the economic downturn, Bronfman said.

Ad supported music services are being hit hard by the ailing economy and the hobbled online ad market. As ad revenues disappear, these companies are trying to charge for some of services, but they haven't gained much traction yet. No one in the sector, not even YouTube, has reported profits. Apple, which sells downloads and doesn't rely on advertising, continues to be the only significant music service making money from the sale of music downloads.

The big question is whether Warner Music's recent moves--the write down, the label's acrimonious departure from YouTube, and decision not to invest more money in Imem--is a reflection of a larger pullback from the tech sector by the music industry.

Imeem, a social-networking site, was teetering on collapse recently, but sources told CNET News that it had received new investment that will keep the site operating for much of the year.

Lala has gone through several business models, but the latest iteration has encouraged some of the music labels with the amount of revenue it has reported generating, music industry sources said several months ago.

MySpace Music is the joint venture founded by News Corp., and the music labels. On Wednesday, CNET reported that some of the labels were dissatisfied with the revenue generated by the 8-month-old music service.

In a conference call with reporters to discuss Warner Music's financial performance, Bronfman said of MySpace: "We continue to hold out a good deal of hope...but, you know, without putting too fine a point on it, (MySpace Music) has disappointed us so far.

"We feel MySpace Music has been slow to create monetization tools," he said, "and to be able to impact in a revenue-generating way, the massive audience that they have been able to attract."

Peter Kafka at All Things Digital was first to report Warner Music's write-down.

For an industry that's supposedly struggling to keep up with customer demand for more bandwidth, the nation's two largest cable operators seem to be doing pretty well.

This week Comcast and Time Warner Cable each reported strong earnings, in spite of the fact that Time Warner has said recently that it needs a new business model to handle growing broadband demand.

Comcast beat analysts' expectations and increased profits 5.4 percent to $778 million. Time Warner Cable's profits fell 32 percent, but this was mostly due to costs associated with the split from its former parent company, Time Warner. The company's revenue was actually up 5 percent to $4.4 billion when compared to the same quarter a year ago.

Comcast also increased revenue by about 5.3 percent to $8.4 billion.

Meanwhile, both companies reduced capital spending. Comcast cut capital expenditures by 19 percent to $1.16 billion. And Time Warner Cable cut its spending by 18 percent to $33 million. For broadband specifically, Time Warner increased revenues 11 percent to $1.1 billion.

The companies also increased subscribers. Time Warner added 225,000 new broadband users and 166,000 new voice-over-IP customers during the quarter. Comcast added 328,613 high-speed Internet customers, down 33 percent from the previous year, and it added 298,433 digital phone customers, also down about 53 percent.

Even though Comcast isn't adding new customers as quickly as it did a year ago and Time Warner's profits aren't as high as they were a year ago, the companies are still adding new subscribers and making money. And yet they are also cutting capital spending.

This financial reality is very different from the one Time Warner Cable has been touting recently, as it tries to explain why it wants to start billing customers based on how much bandwidth they use. Outraged consumers mounted loud protests when the company said it would expand trials of the new billing system. Time Warner backed off the plan for now. But the company still argues that it must do something because the current business model is "not viable."

Time Warner's views are shared throughout the industry. Kyle McSlarrow, president and CEO of the National Cable & Telecommunications Association, supported Time Warner Cable's trials in a blog post stating that they "may serve the vast majority of their customers better by reflecting the growing reality that some consumers utilize far more high speed bandwidth than others."

Smaller cable operators are already starting to meter bandwidth, according to a recent article by the Web site Broadcasting & Cable. Sunflower Broadband in Northern Kansas has been using metered pricing for the past four years. And Wave Broadband, which provides service in Oregon and Washington, is about to launch metered billing on its network.

The chief operating officer of Sunflower Broadband, Patrick Knorr, says bandwidth-based billing is the only way to manage infrastructure, the B&C article said. He believes that with all the high-definition content being downloaded that there is no way a cable company could keep up with demand at current flat rate prices. And like Time Warner's CFO, Landel Hobbs, Knorr says that consumption-based billing is "unsustainable."

But when cable operators add customers and cut capital spending on infrastructure, it doesn't seem as though they are even attempting to keep up with customer demand for more bandwidth. And the fact that they are still making profits also shows that they have the money to spend. So for consumers--who already feel they pay too much for broadband services compared to people living in other countries--Time Warner's argument that it has no choice but to meter traffic is a hard to pill to swallow, especially in this economy when so many people are financially strapped.