AOL drags down TW's Q3

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AOL dominated Jeff Bewkes' first investor call as the official CEO-designate of Time Warner on Wednesday, when the troubled unit reported a 23% drop in profit during its third quarter.

The slowdown at the new-media division offset a strong quarter in other parts of the company and contributed to net income being slashed in half, from $2.3 billion last year to $1.1 billion this year.

Revenue at the conglomerate rose 9% to $11.7 billion, a number that topped Wall Street expectations, and even the profit slide was partly the result of one-time factors last year like the sale of a telco unit.

Still, investors had sent the stock down 2% by midday, largely because of AOL's figures.

The ad unit, which has been reorienting itself around a content and advertising strategy for more than a year, saw revenue fall from $2 billion to $1.2 billion and operating income slide from $550 million to $430 million.

TW's profit figures did reflect strong performances in several entertainment divisions, particularly on the film side.

Warner Bros. rebounded from a relatively mediocre third quarter in 2006; the studio grew revenue by 33% and profit by 71% thanks to such Warners hits as "Harry Potter and the Order of the Phoenix" and "Ocean's Thirteen," and New Line movies "Rush Hour 3" and "Hairspray."

The company touted upcoming films from the two studios, including the Vince Vaughn vehicle "Fred Claus" and fantasy epic "The Golden Compass."

Executives, who were not asked about and also did not address the subject of the writers strike, said that on the television side, growth potential continued to be higher on cable than broadcast, citing the traction gained by a host of TBS and TNT originals.

Television saw an 8% uptick in revenue to $2.6 billion, while operating income jumped from $785 million to $830 million.

But it was AOL that captured the attention of analysts, who peppered Bewkes with questions about the fate of the unit.

Among the concerns to analysts were TW's warning that the fourth quarter would continue the trend of slower ad sales at AOL.

But outgoing CEO Richard Parsons and Bewkes both maintained that the company would stay the course of its ad-driven strategy. "We like our position and the organizational ability that we are building inside AOL," he said.

Parsons acknowledged to analysts that AOL advertising has been "a disappointment compared to some of your expectations," but said execs continues to be satisfied with the results.

TW also announced the purchase of ad-services firm Quigo to help bolster its targeted-search business.

The call was the closest to a public handoff that the company will engage in as Parsons steps aside Jan. 1 to make way for former HBO chief and COO Bewkes.

Asked about differences in management, Bewkes first said, "I really don't have the answer to that," then went on to give a more elaborate response that said TW must "adapt all our products, our journalists, how we offer them, the kind of advances in community and communication that go along with editorial and entertainment products, and all that requires a lot of trial and error, quick movement and the ability to change course."

Cable saw a 23% profit gain in the quarter, a fact that would likely fuel further speculation about the ownership status of the 84% of the division held by the conglomeration.

Bewkes has said that many possibilities are in play for the division, which has been enjoying a strong run during the past several years, including a complete spinoff. The unit did report a 79% profit falloff in its earnings call, driven by a subscriber drop.
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