TW reports film-fueled Q2 profit increase

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NEW YORK -- Time Warner Inc. on Wednesday morning reported a 5.2% increase in its second-quarter profit as film unit financials were better than expected, while its cable unit disappointed in terms of subscriber momentum.

However, overall results were roughly in line with many Wall Street projections.

Based on the results, TW reaffirmed its full-year 2007 financial expectations, but management in a conference call reduced its advertising revenue growth outlook for AOL, citing a shift of ad dollars to third-party networks, among other factors.

The world's largest media conglomerate also unveiled a new $5 billion stock buyback program to return further money to shareholders. It also recently increased its quarterly dividend. However, analysts said some investors will be disappointed that the buyback wasn't more massive.

However, chairman and CEO Richard Parsons said in a statement that TW also "will continue to invest in organic growth, as well as in attractive strategic opportunities," a hint that the sector biggie wants to keep some of its powder dry for possible acquisitions.

TWC management in a separate conference call Wednesday morning confirmed that it is participating in the auction of small cable operator Insight Communications.

While analysts in first reactions lauded the overall solid results at TW and the better-than-predicted film figures, key operating results that drew some concerns included the weaker-than-expected advertising revenue gain at AOL and slower-than-projected subscriber momentum at Time Warner Cable.

TW's profit rose from $1.0 billion in the year-ago period to $1.07 billion in the latest quarter. Revenue increased 6% to $11 billion.

The company's film unit reported a decline in operating income before depreciation and amortization of 24% year-over-year to $174 million, driven by higher print and advertising expenses, including for "Harry Potter and the Order of the Phoenix" that came into theaters after the end of the quarter, and lower TV contributions. Film revenue fell 5% to $2.3 billion, with the company citing the same factors along with tough year-ago home entertainment comparisons.

In a conference call Wednesday morning, Parsons predicted the film unit would bring in growth for the full year and be "up strongly" in the second half of the year, saying the latest Potter film had made for "a great start," making $700 million in worldwide boxoffice so far. Parsons cited "Rush Hour 3," "The Golden Compass" and "I Am Legend" as key upcoming releases.

Jonathan Jacoby, analyst at Banc of America Securities, said the film results were ahead of his estimates for a 17% revenue decline and $80 million ahead of his OIBDA forecast. "The upside relative to expectations was probably driven by timing for film revenues and profitability, and therefore we do not expect the upside to translate into higher numbers for the year," he said in a first reaction.

At TW's TV networks unit, revenue declined 1% in the second quarter to $2.6 billion as advertising revenue fell 11%, with TW citing the shutdown of the WB Network as a key reason. Turner networks advertising increased 6%.

Adjusted OIBDA for the TV unit climbed 10% to $746 million, though. That figure included $16 million of restructuring and severance charges at HBO. The company didn't detail those charges, leaving it unclear if they included costs for the departure of former HBO boss Chris Albrecht.

TWC, of which TW holds more than 80%, was once again the conglomerate's fastest-growing business, making this the 14th consecutive quarter. Operating income before depreciation and amortization at the unit jumped 52% to $1.4 billion, with revenue up 59% to $4 billion, thanks to continued subscriber growth and the addition of cable systems acquired in the Adelphia Communications transaction.

"Total revenue-generating unit net adds were 537,000, almost 150,000 below our estimate of 685,000," Goldman Sachs analyst Anthony Noto said in a first reaction. For example, TWC had basic subscriber losses of 57,000, compared with Noto's expectation for stable numbers and a Wall Street consensus for 11,000 losses.

"Lower net adds likely reflect seasonality, but we believe investors will worry until the third quarter is reported whether the trend reflects something other than seasonality (i.e. competition and or execution on acquisition integration)," Noto wrote.

At AOL, revenue dropped 38% to $1.3 billion as the Internet unit lost 1.1 million subscribers in the quarter. AOL's online advertising revenue climbed 16%. AOL's adjusted OIBDA decreased 2% to $485 million.

"While AOL beat our OIBDA assumptions, the mix was disappointing with ad sales up only 16% versus our estimate for 29% growth," Jacoby said. "Our hunch is that AOL saw similar trends to others in the industry with a mix shift away from "prime" display towards remnant."

Indeed, on the call, Parsons cited a shift of money from premium display ads to third-party ad networks as the key factor for what he called a "significant slowdown" in growth. As further factors, he mentioned the first anniversary of a big ad deal with Google Inc. and recent changes to AOL channels, which he said should boost user engagement and ad revenue over time.

As a result of these trends though, TW reduced its AOL ad outlook, with Parsons saying the firm is taking back its previous projection of growth at or above industry levels. Instead, TW CFO Wayne Pace predicted AOL ad gains in the second half would be "more like in the second quarter."
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