Time Warner Casts a Wider Profit

Shares of the media giant retreated, despite higher third-quarter results thanks to integrated new cable systems, asset sales, and AOL

Time Warner Inc. (TWX) announced soaring third quarter profit on Nov. 1, as the New York City media giant integrated recently acquired cable systems and revamped its Internet unit AOL. The company also affirmed its outlook for the year.

Time Warner had net income of $2.3 billion, or 57 cents per share during the three months ended Sept. 30, and boosted by asset sales and tax gains. That compares to $853 million, or 18 cents per share during the comparable 2005 quarter. Excluding items, Time Warner's earned 19 cents a share, lower than average analyst estimate of 20 cents a share.

The company's revenues rose to $10.9 billion during the quarter, a 7% improvement over the same period in 2005. The mean analyst estimate had been for revenue of $11.1 billion, according to the San Francisco research firm StarMine.

Time Warner's relatively impressive earnings results reflect an acquisition that was completed July 31. Both Time Warner and the cable company Comcast Corporation (CMCSA) recently bought Adelphia Communications Corp. Among other things, the deal involved the transfer of Time Warner cable systems to Comcast and Adelphia Communications and Comcast cable systems to Time Warner.

Time is also revamping AOL and recently announced a plan to offer email and other AOL products for free to U.S. broadband users. In spite of such efforts, the AOL service had 15.2 million U.S. subscribers during the quarter, a decline of 4.9 million from the year-ago quarter. But Time Warner is hoping to survive now on its revenue from online advertising, not subscribers.

"We're particularly encouraged by AOL's early progress in making the transition to an advertising-supported business. Just as importantly, Time Warner Cable is generating outstanding results, even while successfully integrating its newly acquired cable systems," Chairman and Chief Executive Officer Dick Parsons said in a press release.

AOL's revenues declined 3% to $2.0 billion during the quarter, as a 13% decrease in its subscription revenues was countered by a 46% increase in advertising revenues.

The media giant's earnings include much more than AOL. For example, Time Warner's filmed entertainment revenues, under Warner Bros. Entertainment & New Line Cinema, decreased 10% to $2.4 billion during the recent quarter. The money made from Superman Returns didn't compare to that from hits such as Warner Bros.' Charlie and the Chocolate Factory, Batman Begins, and New Line's Wedding Crashers during the third quarter 2005.

After the news, Time Warner's stock fell nearly 1% to $19.83 in afternoon trading on the New York Stock Exchange. The stock, which has languished in the teens for the last four years, has been climbing recently and touched a 52-week high of $20.08 on Oct. 26.

Standard & Poor's Equity Research analyst Tuna Amobi hiked his 12-month target price on the stock by $2 to $22, explaining that he was "encouraged by ads at TNT/TBS, and HBO subscriptions." He also thinks that the box office results from the movie The Departed could ease a tough fourth quarter for Time Warner's film business, and expressed "modest hopes" for the upcoming holiday animated movie Happy Feet.

"After TWX's conference call, we still see potential near-term catalysts on cable triple-play, and increasingly, AOL's ad growth/cost cuts," Amobi wrote in a research note on Nov. 1. He also noted that the company is on track to spin off its cable business in an IPO that's likely in the first half of 2007, but it gave no new insight on a possible spin off of its online unit, which is evidently on track with its new plan. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.)

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