TW's film units lag in strong quarter

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NEW YORK -- Time Warner Inc. reported a sharply higher third-quarter profit driven by one-time gains and improvements at its cable and AOL units that counterbalanced weaker results at its film division.

Management also reaffirmed the firm's full-year financial outlook, and chairman and CEO Richard Parsons said all key units, including the film operation, remain on track to meet 2006 expectations.

Asked about the film unit's outlook after recent slip-ups, TW president and chief operating officer Jeffrey Bewkes said 2005 was "a hell of a year" and 2006 will end strong thanks to "The Departed" and upcoming key releases like "Happy Feet." In a reference to "Poseidon," he said that "every once in a while, one of your ships sinks." But he emphasized that he is "very confident that we will grow earnings on the film side next year."

In regard to recent market talk about a possible sale of AOL to Yahoo! Inc. or others, Bewkes said, "AOL is definitely a core asset for the company and growing really well."

TW on Wednesday posted a profit of $2.3 billion for the third quarter, up from $853 million a year ago. The world's largest entertainment firm's bottom-line figure for the latest period included various one-time items. They included $729 million of net investment gains from the sale of interests in Time Warner Telecom and Warner Bros.' Australian theme parks and a $373 million tax benefit primarily from net capital loss carryforwards. That was offset in part by $29 million in net expenses for securities litigation and government investigations and an impairment charge to write down the fair value of good will at WB Network of about $200 million. The year-ago quarter also featured one-time items. In the aggregate, all items boosted the latest quarter's bottom line by $590 million.

TW's adjusted operating income before depreciation and amortization for the third quarter rose 16% to $2.9 billion, driven by double-digit gains in the cable and AOL units and a smaller increase at the TV networks and publishing segments.

Operating income was up 1% to $1.7 billion.

Revenue rose 7% year-over-year to $10.9 billion, led by gains in the cable systems and networks divisions.

Free cash flow grew from $1.28 billion a year ago to $1.45 billion.

"Time Warner continues to build momentum and deliver value for our shareholders," Parsons said, adding that his team is "particularly encouraged" by the early results of AOL's move to an advertising-focused business model and calling TW Cable's performance "outstanding."

Still, TW shares, which have been on a big upswing as of late, declined 1.2% on Wednesday to $19.77.

Analysts generally gave the financials good reviews but also raised some concerns, including about a slowing cable telephony user growth rate.

"Given the recent strength in TW share price, it is not surprising to see the stock pull back slightly on mixed (albeit mostly positive) results," said Thomas Eagan, an analyst at Oppenheimer & Co.

Bear Stearns analyst Spencer Wang said the figures overall exceeded his expectations. "The two areas of major variance were AOL, due to better-than-expected ad growth and margins and filmed entertainment due to a $10 million reduction to legal reserves, but also stronger-than-expected international sales of TV shows," he said.

Merrill Lynch analyst Jessica Reif Cohen said the results "were well above our expectations due to better-than-anticipated results at all divisions except for Time Warner Cable."

TW on Wednesday also reiterated its full-year growth forecast for adjusted OIBDA in the low double-digit percentage range.

In a conference call with analysts, Parsons and Bewkes again were bullish on the outlook for TW Cable after the acquisition of cable systems from Adelphia Communications and Comcast Corp.

However, they also again declined to specify the likely timing of TWC's listing on the stock exchange, citing a quiet period. Analysts expect a listing to happen early next year.

Meanwhile, TW's net debt stood at $32.2 billion, double the $16.1 billion recorded at year's end. The increase reflects, among other things, the acquisition of cable systems from Adelphia Communications and Comcast Corp. and the company's continued share buybacks.

TW also said it has repurchased $13.4 billion in shares through Tuesday and is on track to buy back at least $15 billion by year's end at current stock-price levels. The remainder of its $20 billion repurchase program will be completed next year, it reaffirmed.

As expected by Wall Street, TW's film unit posted lower results because of tough year-ago comparisons with "Charlie and the Chocolate Factory," "Batman Begins" and "Wedding Crashers," and recent disappointments, like "Lady in the Water." The unit saw OIBDA decline 14% to $210 million in the third quarter as revenue fell 10% to $2.4 billion. The latest period included what TW called the "strong" worldwide theatrical performance of "Superman Returns." The unit's bottom line benefited from about $10 million in adjustments to reduce certain legal reserves.

TW's networks unit grew revenue 4% to $2.5 billion and adjusted OIBDA 9% to $800 million. Advertising revenue rose 6%, led by 16% growth at Turner, offset partly by a 36% decrease at WB Network, which closed Sept. 17 and became with UPN the CW. Also, a 23% decline in content was driven by a decrease at HBO because of a difficult year-ago comparison, which included higher syndication sales of "Sex and the City."

Asked about fourth-quarter scatter market advertising trends, Bewkes said it was "good and picking up" with prices in the mid- to at times high-single-digits above the upfront market.

Cable unit revenue jumped 44% year-over-year to $3.2 billion as operating income before depreciation and amortization rose 28% to $1.1 billion thanks to the takeover of cable systems from Adelphia and Comcast, as well as continued advanced service customer gains.

The unit added 33,000 basic cable users at its historic systems, offset in part by a 30,000 loss in newly acquired systems, to reach a total of 13.5 million once adding in the effect from acquisitions. TWC also won a net 136,000 digital cable users in the quarter for a total of 7 million, 251,000 high-speed Internet customers to reach 6.4 million and a weaker-than-predicted 187,000 telephony users to reach a total of 1.6 million.

Reif Cohen said that while the cable unit was "generally strong, but lower voice net adds were a concern." Others echoed her in that assessment. Analysts pointed out that this was the second quarter in a row of declining phone additions. Parsons said though that "significant opportunities" remain for next year, and Bewkes cited special promotions from phone competitors and TWC's already high penetration for the slower gains.

AOL revenue fell 3%, less than many analysts had predicted, in the latest period to $2 billion, with OIBDA up 21% to $563 million because of high-margin advertising gains and cost reductions. The division saw advertising revenue jump 46%.

Reif Cohen called AOL "the big surprise" of TW's latest quarter, saying the unit's 2.5 million subscriber loss in the period to 15.2 million was ahead of her 2.1 million forecast. "Higher sub losses should be indicative of a rapid transition to an advertising-based model and are therefore likely to be taken positively by the market," she said. Advertising growth was "well ahead of Yahoo! and the market, suggesting significant market share gains in display advertising and continued benefits from improved monetization by Google," she added. Similarly bullish, Eagan said: "AOL page views decline of 3% -- an improvement over the previous 15% declines -- signal a turnaround."

Parsons said AOL has won online ad market share in the past two quarters and expects to grow in line with or ahead of the market next year.
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