Cable boosts TW; Q1 profit beats Street

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NEW YORK -- Time Warner Inc. on Wednesday reported an 18% decline in its first-quarter profit, but the figure and other results came in ahead of Wall Street estimates as Time Warner Cable had another strong showing and AOL continued to record improvements.

Both of those units brought in double-digit percentage improvements in the closely watched metric of adjusted operating income before depreciation and amortization.

This helped counterbalance weakness elsewhere, including at the film unit, whose profit fell 27% as the boxoffice success of "300" and such home video titles as "Happy Feet" and "The Departed" were not enough to offset the strong year-ago business from the DVD releases of "Harry Potter and the Goblet of Fire" and "Wedding Crashers."

TW management promised that big releases in the second half -- such as the fifth installment of the "Potter" franchise, "Ocean's 13," "Rush Hour 3" and "The Golden Compass" -- will make up for the current sluggishness.

Based on its first-quarter results, the world's largest media conglomerate raised its earnings-per-share expectations for full-year 2007 from $1 to $1.05 before special items. TW also reiterated its full-year 2007 projection of adjusted operating income before depreciation and amortization gains in the mid- to high-teens percentage range from the $11 billion recorded in 2006.

"We have gotten off to an excellent start" to the year, TW chairman and CEO Richard Parsons said.

The company previously predicted that earnings would rise in all units this year, including at the film division.

TW posted a first-quarter profit of $1.2 billion, compared with $1.5 billion a year ago. The latest quarter included a gain of about $670 million from the sale of AOL's Internet access business in Germany and $146 million in investment gains from a cable transaction with Comcast Corp., offset partly by $163 million in expenses related to securities litigation and government investigations.

Revenue rose 9.2% year-over-year to $11.2 billion. Operating income jumped 38% to $2.5 billion, with adjusted operating income before depreciation and amortization up 19% to $3.1 billion.

"We delivered an impressive first quarter," Parsons said in a memo to TW employees. "In addition, we've continued to execute against the broader strategic goals we set for ourselves at the beginning of this year -- particularly in accelerating the digital progress at our businesses."

TW shares closed up 1.7% on Wednesday at $20.94. The stock has traded between $15.70-$23.15 during the past year.

TW said it has repurchased about 1 billion of its own shares for a total value of $18.4 billion through Tuesday and reiterated it expects to complete a $20 billion stock-buyback program by midyear.

Asked whether the company would most likely use its cash for dividend, buybacks or maybe even acquisitions once the program is finished, Parsons on a conference call Wednesday said the TW board would review its options.

"We believe AOL-oriented acquisitions are likely," Oppenheimer & Co. analyst Thomas Eagan suggested in a research note.

The conglomerate's net debt stood at $34 billion as of March 31, up $552 million from the level recorded at the end of 2006, thanks to repurchases and other items.

At TW's filmed entertainment division, first-quarter revenue decreased 1% to $2.7 billion, with OIBDA down 27% to $332 million.

TW Cable, which hosted its first separate earnings call as a publicly traded company Wednesday, reported a revenue gain of 61% to $3.9 billion in the latest period, driven by the acquisition of cable systems in the Adelphia Communications deal and the addition of Kansas City assets under a joint venture separation with Comcast. OIBDA grew 54% to $1.3 billion.

The unit added 46,000 net basic cable subscribers to reach 13.4 million. Its long-held systems gained 66,000 basic users, marking the seventh consecutive quarter of growth and the best quarter in more than five years, while newly acquired systems lost 20,000 basic subscribers.

TWC also signed up 234,000 digital phone customers, 278,000 digital cable users and 356,000 high-speed Internet customers.

Overall, Goldman Sachs analyst Anthony Noto said TWC's results "point to some progress being made at the acquired systems."

Asked about recent speculation that TW could sell a bigger stake in TWC, Parsons again expressed his confidence in the strength of the industry, saying, "We like the cable business," adding the management team of the unit is "shooting the lights out" with their current performance.

"We accelerated quarterly subscriber net additions in all key services, including basic and digital video, residential high-speed data and digital phone," TWC president and CEO Glenn Britt said. "We are also moving closer to completing the integration of the acquired systems and by year's end expect these systems to offer Time Warner Cable's advanced residential services."

Asked about the success of TWC's day-and-date film release trials, TW president and COO Jeffrey Bewkes said Wednesday that it is still too early to tell. However, he then said the business effects "look to be fine for the studios and cable companies," with the only potential negative, if any, on video rentals.

TWC shares closed up 2% on Wednesday at $36.95.

TW's TV networks unit reported flat first-quarter revenue at $2.4 billion as higher subscription and content revenue was offset by a 12% advertising decline. OIBDA climbed 6% to $860 million. While the Turner networks boosted advertising revenue by 6%, the closing of the WB Network dragged down overall ad figures.

Asked about the current advertising scatter market, Bewkes said in the earnings call that it has been "strong" in the first and second quarters with mid- to high-single-digit percentage increases in ad rates over last year's upfront market levels.

AOL, reporting its second quarterly figures since Randy Falco took the helm of the unit, saw revenue fall 25% to $1.5 billion as a 40% advertising increase was more than offset by a 43% subscription decline. OIBDA rose 27% to $542 million on lower marketing and network spending. AOL lost 1.2 million U.S. subscribers in the quarter to 12 million.

Parsons said in Wednesday's call that AOL is on track to start growing its page views, which managed to stay about even when compared with the previous quarter for the first time in a while.

He also signaled that TW does not plan to sell or spin off AOL right now, saying, "we are focused on executing this strategy" that has the unit focus on growing its traffic and advertising.
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