October 22, 2003 7:38 AM PDT

Time Warner sees growth despite AOL

Time Warner on Wednesday reported a profitable third quarter even as its American Online business unit continued to post disappointing results.

The media giant, which recently dropped the AOL moniker from its name, posted net income of $541 million, or 12 cents a share, for the third quarter, compared with $57 million, or 1 cent per share, one year ago. The results for this year's quarter handily exceeded Wall Street analysts' estimates of 9 cents per share, as compiled by First Call.

Time Warner's revenue for the third quarter reached $10.3 billion, a 3.7 percent increase over the same period last year.

For the full year, Time Warner reaffirmed its business outlook, reporting that it expects annual revenue growth in the mid-single digits, based on the $41 billion in revenue it reported for 2002.

Solid performance from the company's TV and cable operations was overshadowed by continuing struggles at AOL. Revenue for the Internet service provider business fell 5 percent to $2.1 billion for third quarter from $2.2 billion in the year-ago period.

The biggest blemish for AOL continues to be its subscriber losses. The division lost 688,000 U.S. subscribers in the third quarter largely from the elimination of free and promotional users and from 272,000 paid customers who defected. However, AOL added 340,000 new broadband members to end the quarter at 2.6 million, up from 2.2 million last quarter. AOL has been marketing its service as a $14.95, "bring your own access" plan for people using broadband services provided by cable or phone companies

As expected, advertising revenue at AOL continued to fall, plunging 33 percent from last year to $178 million, but remaining essentially flat from the previous quarter's $179 million. Chief Financial Officer Wayne Pace added that growth from new advertising deals and its paid search partnership with Overture Services are helping to stabilize the business.

"We believe we have stopped (AOL's) sequential decline," Pace said during an conference call with Wall Street analysts. "Reported advertising revenue will bottom out in 2003 and grow next year."

Meanwhile, Time Warner's cable business continued to grow and saw its operating income climb 6 percent in the third quarter on a 10 percent increase in revenue. The company said subscription revenue grew by 13 percent, driven by adoption of high-speed data and digital video services.

The nation's second-largest cable provider gained 190,000 residential broadband subscribers for a total of 3 million. That's up from 170,000 subscribers added last quarter.

Despite these gains, executives remain cautious about the effects of competition from digital subscriber line (DSL) services offered by phone companies. The Baby Bells have been aggressively cutting prices for months, reporting solid gains in residential DSL access. SBC Communications on Tuesday said that it added 365,000 new DSL customers for a total of 3.1 million. BellSouth on Wednesday reported 111,000 DSL additions, for a total of 1.3 million subscribers.

Cable companies have resisted following suit and instead increased their base speeds. But it remains to be seen whether either plan will change cable's market share lead over DSL.

"We haven?t felt the impact yet of the DSL marketing campaigns," said Don Logan, chairman of Time Warner's media and communications division. "It's too early to understand what the impact may have been in our net adds situation."

However, Logan acknowledged that price cuts for its own Road Runner service may have helped the company add more broadband subscribers. If need be, he said, price cuts could be "another arrow in our quiver."

 

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