TW Q4 profit soars; '07 looks 'strong'

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Time Warner Inc. on Wednesday reported a 34% increase in its fourth-quarter profit, boosted by another strong showing of Time Warner Cable and the company's TV networks as well as by gains from the sale of AOL businesses in Europe and tax benefits.

TW chairman and CEO Richard Parsons lauded 2006 as "a pretty good year" and promised "another strong year" for 2007.

Earnings are expected to rise in all units this year, management said, including at the film division that finished 2006 down because of tough year-ago comparisons and some flops.

Parsons also said his team was "pleased with the meaningful gains" in TW's stock as of late after years of stagnation. However, he also vowed to continue shareholder-friendly initiatives to further boost shares, saying "we are far from satisfied."

The world's largest media conglomerate posted a fourth-quarter profit of $1.8 billion, compared with $1.3 billion a year ago. Revenue rose 8.2% year-over-year to $12.5 billion.

The latest quarter included an $833 million profit boost from special items as a $769 million gain from the sale of AOL's Internet access businesses in Europe and $900 million of tax benefits more than offset one-time expenses. The year-ago quarter also featured special items which on a net basis boosted profitability by $206 million.

For 2006, TW's revenue climbed 4% to $44.2 billion, with profit more than doubling, from $2.7 billion to $6.6 billion. Adjusted operating income before depreciation and amortization was $11.1 billion for 2006, an 11% gain.

TWC and the conglomerate's TV networks business brought in revenue and profit gains for the quarter and the year.

TW projected that its overall profit for 2007 will come in at about $1 a share, including 10 cents of gains from the sale of an AOL unit in Germany. Adjusted OIBDA will rise in the middle- to high-teen percentage range, the company said.

However, executives warned of tough first-quarter comparisons, especially in the film unit, where "Wedding Crashers" and "Harry Potter and the Goblet of Fire" alone added about $200 million in operating cash flow a year ago.

Many on Wall Street felt the guidance for this year was cautious, which helped pull down TW shares 0.8% on Wednesday to $21.87.

But Merrill Lynch analyst Jessica Reif Cohen joined others in arguing that the guidance was simply "conservative." In a report, she said: "The acceleration of the current $20 billion share-repurchase program, which management now expects to finish by the end of the first half of 2007 (we had assumed it would take the full year), could drive upside to earnings-per-share guidance."

Through Tuesday, TW said it has repurchased about $16.4 billion in its own stock.

At TW's filmed entertainment division, fourth-quarter revenue fell 15% to $3.1 billion, with adjusted OIBDA down 39% to $240 million.

For 2006, film revenue was down 11% to $10.6 billion, with adjusted OIBDA off 7% to $1.1 billion.

TW cited a record 2005 at Warner Bros. thanks to such releases as "Goblet of Fire" and "Charlie and the Chocolate Factory," the weaker performance of its 2006 slate and the resulting home video declines. However, the firm lauded successes, such as "Superman Returns," "Happy Feet" and "The Departed."

Parsons said Warner Bros. had a "very solid 2006" and its sixth consecutive year of exceeding $1 billion in boxoffice. TW's home video business also ranked No. 1 for the sixth year in a row, he added.

TWC revenue rose 58% to $3.7 billion in the fourth quarter on the Adelphia deal, with OIBDA up 46% to $1.3 billion.

The unit added 211,000 digital phone subscribers, below analysts' estimates, 246,000 digital cable customers and the same number of high-speed Internet users.

Basic cable subscribers declined by 23,000, dragged down by 52,000 losses in the recently acquired systems. TWC's legacy systems added 29,000 basic subscribers, marking their sixth consecutive quarter of growth. Management cited Los Angeles and Dallas cable systems it acquired in the Adelphia deal as the key reasons for the customer losses, saying they accounted for 80%.

TW president and chief operating officer Jeffrey Bewkes said he expects to stem the Los Angeles losses in the second half. "L.A. is a very complicated integration of three systems," he said, citing a high-speed service disruption and recent channel-lineup changes as initial hiccups.

He also said that there is a margin gap of 10% between TWC's legacy and acquired systems, which he expects the company to close over time.

Parsons also updated investors on the expected start of trading of TWC shares, signaling it might take more time. TW will continue to follow two paths simultaneously and hopes to get TWC shares trading "as expeditiously as possible," he said.

The company is waiting for a court decision that could give the go-ahead to the Adelphia bankruptcy plan, which would give Adelphia bondholders shares of TWC and bring them to market that way. But Parsons said a decision will come only Tuesday or later.

TW also has filed for a formal initial public offering of TWC as a second possible path to a stock listing. "Though initially viewed as more complex and lengthy for both parties, we believe the IPO process now appears to be the quicker route for regular way trading of TWC," Oppenheimer & Co. analyst Thomas Eagan said in a report Wednesday.

Wall Street observers now expect official trading in TWC shares could start any time from late February to March.

TW executives also highlighted services for small and medium businesses and interactive advertising as the next growth opportunities for TWC — echoing recent comments from Comcast Corp. chairman and CEO Brian Roberts.

TW's TV networks unit revenue rose 10% in the fourth quarter as OIBDA jumped 12%, with Turner networks advertising revenue up 12%, including a 5% gain for CourtTV. Executives signaled that advertising scatter market trends are strong.

AOL, reporting its first quarterly figures since Randy Falco took the helm of the unit, saw revenue fall 7.8% to $1.9 billion, exceeding Wall Street estimates. Profit dropped 10% to $302 million.

AOL lost 2 million U.S. subscribers in the quarter, but its advertising business continued to grow quickly with a 49% gain. Analysts said this shows that AOL finally has started gaining ad share from competitors like Yahoo! Inc.

Parsons on Wednesday also said TW's talks with Liberty Media continue about a deal that would see Liberty swap a large part of its stake in TW for assets. The CEO said talks have focused on swapping for a subsidiary that contains assets and cash but didn't provide additional details.
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