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AOL downdraft

SEC probe & online woes sock TW stock

NEW YORK — Time Warner’s net profit jumped last quarter on robust TV and cable. But the stock took a hit Wednesday in a glum market and after a report that Richard Parsons and Steve Case were subpoenaed in an ongoing probe by the Securities and Exchange Commission.

The shares dropped 3.15% to $15.06, falling farther than the broader market. Federal investigations and the tribulations of America Online continue to overhang the stock and the company, although many on Wall Street think less ominously than they have in the past 18 months. The SEC and Dept. of Justice have been scrutinizing the conglom’s accounts since at least the summer of 2002.

Time Warner, which yanked “AOL” from its name a week ago, said net income soared to $541 million in the three months ended Sept. 30 from $57 million the year before. Revenue rose 4% to $10.3 billion. Cash flow was up 9% to $2.3 billion.

During a conference with analysts, chairman-CEO Parsons gave top billing to the conglom’s TV networks and Time Warner Cable, where strong numbers offset weaker perfs at AOL, Warner Music and Time Inc. and a mixed bag in Filmed Entertainment.

Parsons didn’t comment on the SEC subpoenas, which, according to a report in the New York Times, relate to an advertising deal with German media group Bertelsmann. However, they’re not surprising given the ongoing probe into the company’s accounts.

Parsons bullish

He was upbeat about the company’s prospects.

The music group is up for sale. Parsons seemed confident AOL is about to turn around — despite losing 2 million subscribers in a year. And chief financial officer Wayne Pace said the company will knock some heads at Time Inc.’s big trouble spot, the money-losing Time Life direct marketing biz.

Time Warner’s debt stood at a whopping $24 billion at the end of the quarter. Parsons said it will fall to $20 billion next year and indicated that a combo of less debt and more cash means the company will start trolling for acquisitions in 2004 — with cable systems the arena of choice. Also, Time Warner will try to unwind Comcast from a 21% stake in Time Warner Cable. An initial public offering of the unit that would have let Comcast cash out has been indefinitely postponed due to the federal inquiries.

Cable cash-flow pipeline

Cable provides the bulk of the conglom’s cash flow. It saw revenue jump 10% as customers continued to adopt digital video and high-speed data service. Naturally, Time Warner Cable also raised rates. Execs were optimistic that new tech offerings like personal video recorders will keep the business growing rapidly.

During the quarter, Time Warner Cable added 131,000 digital video subscribers. That means about 4.2 million subs — nearly 40% of the company’s 10.9 million total subs — have gone digital. It also added 190,000 residential high-speed data (broadband) subs, raising that total to 3 million.

At the Networks group, more subscribers and higher rates boosted revenue at the core Turner nets and HBO. Revenue rose 22% at the WB on higher CPMs and ratings. The company saw higher licensing and syndication fees from “Everybody Loves Raymond.”

Filmed entertainment, driven by stellar box office results in the first half of the year, saw revenue dip last quarter on tough comparisons with the year earlier — particularly in homevideo and syndication. The studio, the most prolific generator of primetime network TV series, faced hefty production costs in the quarter.

Film bright spots

The company cited the international theatrical run of “The Matrix Reloaded” and the homevid release of “The Lord of the Rings: The Two Towers” as bright spots for the quarter. Domestic releases included “Freddy vs. Jason” and “Terminator 3: Rise of the Machines.”

“The Texas Chainsaw Massacre” had a gangbuster opening last weekend. And Parsons waxed enthusiastic about the studio’s fall lineup, with “The Matrix Revolutions,” “The Last Samurai” and “The Lord of the Rings: The Return of the King.”

Warner homevideo continued to dominate with 23% of the DVD market and nearly 19% of the VHS market in the first nine months of the year.

At the conglom’s sore spots, America Online lost 2 million U.S. subs year on year, bringing the total down to 24.4 million at the end of September. About 688,00 subs bailed from the preceding June quarter. Ad revenue continued to plunge. Still, continued cost cutting helped boost cash flow. So did a lively performance by AOL Europe. The unit added revenue from new members and a strong euro-weak dollar exchange rate.

‘Bottoming out’ forecasted

Parsons, who had reportedly given AOL until year end to launch a turnaround, or else, seemed to see progress. He expects the bad times to “bottom out” this year, he said, adding, “We are confident the company will return to growth in 2004.” Time Warner’s move last week to scrap AOL from its corporate name may take some pressure off the ‘Netco as it tries to nurse itself back to health. Now it’s just one division among many.

Warner Music, the second biggest music group after Universal, posted lower numbers across the board as global sales continued to slump industrywide. Market share has nosed up this year to 18.3% at the end of last quarter from 17% at the end of last year.

Time Warner continues talking with EMI of the U.K. and financial buyers including Edgar Bronfman Jr. about unloading the music company. Parsons referred several times during the conference call to the sale of “non-core” or ” non-strategic” assets.

Lastly, publishing had a nasty quarter. At Time Inc., magazine ad revenue softened, pension expenses jumped and the conglom faces a brewing disaster at Time Life, which lost $20 million in the quarter and $56 million so far this year. “Management is actively addressing this issue. We plan to significantly limit ongoing losses,” CFO Pace promised.

Key numbers by unit:

  • Cable: Revenue up 10% to $1.9 billion; Operating income up 6% to $394 million; Cash flow up 11% to $752 million.

  • Networks: Revenue up 10% to $2 billion; Operating income up 9% to $509 million; Cash flow up 9% to $566 million.

  • AOL: Revenue down 4.5% to $2.1 billion; Operating income down 7% to $150 million; Cash flow up 2% to $371 million.

  • Filmed Entertainment: Revenue down 7% to $2.5 billion; Operating income up 21% to $319 million; Cash flow up 18% to $390 million.

  • Music: Revenue down 2.5% to $958 million; Swung to an operating loss of $1 million from a $22 million profit; Cash flow down 6.2% to $90 million.

  • Publishing: Revenue down 2% to $1.3 billion; Operating income down 25% to $158 million; Cash flow down 17% to $230 million.

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