July 28, 2004 10:23 AM PDT

Time Warner broadcasts improved results

Time Warner reported better-than-expected second quarter earnings on Wednesday as its cable business added broadband customers and AOL contributed higher ad revenue.

The New York-based media giant posted net income of $777 million, or 17 cents per share, compared with its earnings of $1.06 billion, or 23 cents per share, for the same period last year. The company's second quarter 2003 earnings were inflated by its sale of the Comedy Central cable channel and a settlement payout from Microsoft.

Time Warner beat Wall Street earnings estimates of 15 cents per share, according to Thomson First Call.

Quarterly revenue rose to $10.9 billion, surpassing $9.92 billion a year ago and beating Thomson First Call estimates of $10.4 billion.

Time Warner's numbers benefited from an unexpected surge in advertising revenue at its America Online division, which posted revenue of $2.1 billion and a 13 percent higher operating profit, compared with the same period last year.

Operating income before depreciation and amortization (OIBITDA) for the quarter reached $2.6 billion, a gain of 30 percent from last year. Excluding asset gains and losses, adjusted OIBITDA rose 17 percent.

While Time Warner as a whole showed strength in its core businesses--film, publishing, television and cable--the surprising star for this quarter was its long-battered AOL division.

AOL climbing out of its hole
For the first time since the third quarter of 2001, AOL reported growth in its advertising business. The results mark the first bit of good news since the division's fortunes started nose-diving in 2001 and 2002.

AOL said its advertising revenue rose $42 million to a total of $221 million for the quarter, a 23 percent increase over the same period last year. The improvement was led by paid-search advertising, fueled by its partnership with Google. Paid-search revenue climbed to $72 million, a $31 million increase from the same period last year. However, that is down from $74 million in the first quarter.

AOL saw its year-over-year advertising revenue decline by 40 percent in 2003.

Even though its revenue from Google helped boost its advertising revenue gains, the quarterly decline gives further proof that paid search experienced a seasonal dip last quarter. Earlier this month, Yahoo said its paid search business was flat from the previous quarter, causing its stock to tumble.

"Paid search is no longer in hyper growth," said Jordan Rohan, an analyst at Soundview Technology Group.

Despite the improved ad figures, AOL said its number of U.S. subscribers fell by 668,000 during the second quarter, bringing its total to 23.4 million U.S.-based customers.

In Europe, the company lost 88,000 subscribers, bringing its customer base there to 6.3 million. The Internet service provider has lost more than 2.5 million subscribers in less than two years.

Time Warner acknowledged that dial-up losses will continue. However, executives said that the overall mix of paid subscribers, including its still-sizable base of dial-up customers, will keep AOL strong as advertising revenue rebounds.

"We believe AOL can manage the decline and protect the substantial profits from these business for the foreseeable future," Time Warner CEO Richard Parsons said during a conference call with Wall Street analysts.

In the last quarter, even though AOL lost 1.3 million dial-up subscribers, it added 630,000 "bring your own access" customers. AOL is trying to balance its dial-up losses with AOL for Broadband, which lets members use their AOL identities while accessing the Internet over a high-speed connection supplied by another company, such as Comcast or Verizon Communications.

Cable keeps coasting
Time Warner's cable business turned in a solid second-quarter performance, charting a 10 percent revenue gain to $2.1 billion, as it grew subscriptions by 10 percent. The second-quarter increase was spurred by a 25 percent increase in the cable division's high-speed data revenue, which rose to $86 million. The company said it also benefited from higher returns in its enhanced digital video services business and higher regular cable rates. The unit's advertising revenue climbed by 7 percent.

Time Warner Cable's Road Runner service added 127,000 broadband Internet subscribers in the second quarter to increase its high-speed data business to 3.5 million subscribers. In contrast, Road Runner reported 170,000 new subscribers last year, and 193,000 last quarter.

The division saw its number of regular cable subscribers decline by 21,000 from the prior quarter but added 124,000 digital cable subscribers during the quarter for a total of 4.6 million subscribers.

Despite the positive showing, Time Warner was unable to achieve its previously announced goal of lowering its long-term debt, as it had during the first quarter of this year. After cutting its debt to $18.8 billion during first quarter from $22.7 billion at the end of 2003, the company saw its debt rise to $23.4 billion during the second quarter.

Meanwhile, the Securities and Exchange Commission's investigation of AOL's accounting practices continues to linger. Time Warner warned Wednesday that the company could restate its earnings should the SEC question the company's accounting. However, the company has not offered any indications that the investigation will conclude in the near future.

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This story represents something about AOL that is why AOL is bad for America. At some point, AOL will be nothing more than an ISP specificly for ads. If I wanted to see advertising, I would not even have a computer. AOL sucks and is getting worse. Time Warner really needs to sever their ties "completely" with it. AOL has (and is) become a means by witch a small group of business men can increase their wealth on the backs (and ignorance) of their subscribers. At best, they make an appeal using "parental controls", but with just a little self-education and acceptance of parental responsibility a parent can take that and more control without ever doing anything at all with AOL. AOL offers nothing of any real value.
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