Many arms lift AOL TW

Stock up as Netco posts profit

NEW YORK — AOL Time Warner swung to a profit last quarter, led by booming homevideo, Warner Bros. TV, cable nets and a red hot WB.

One of the rosiest reports in some time for the conglom came just after a $1.2 billion cash infusion from the sale of its Comedy Central stake to Viacom. The shares jumped 5.18% to $14 Wednesday, their highest level in months.

Yet Netco America Online continued to shed U.S. subs — although it added customers in Europe — and AOL TW execs acknowledged that an ongoing Securities & Exchange Commission investigation might delay a planned stock IPO of Time Warner Cable.

“The SEC might gum up the works since we have some issues with them,” chief financial officer Wayne Pace said. “(But) our plan is to press on to complete it as soon as practicable.”

Chairman-CEO Richard Parsons said that could be in the second half of 2003.

Reversing loss

The world’s biggest media company earned $396 million in the first three months compared with a mammoth $54 billion loss a year ago on a one-time charge to write down the value of assets acquired in the merger of AOL and Time Warner.

Revenue rose 6% to $10 billion. Cash flow grew 14% to $2 billion.

Jeff Bewkes and Don Logan joined a conference call with analysts and investors for the first time since they were promoted to top operating posts last summer. The duo splits direct oversight of all AOL TW units, reporting to Parsons.

Bewkes’ longtime fiefdom, HBO, helped burnish numbers at the networks division, where revenue jumped 17% to $2 billion. Operating income was up 16% to $452 million.

Ad sales and subscription revenue rose at HBO and Turner networks; WB ad revenue surged 27% on higher ratings. “The WB is this year’s major success story in television,” Bewkes said. Seven of the net’s top shows are from Warner Bros., where the WB is now housed after a recent shuffle.

TNN and TBS were the two top-rated cable nets last quarter. At CNN, he said, the costs of war coverage “have proved to be well within our expectation and not significant”

Diverse fare

Queried on HBO, Bewkes said the net “is constantly thinking about and working on expanding its range of original programming in all genres.”

It will move from a Sunday night launch pad to add nights or other slots as it brings in new shows. Net still wrestles with the riches of syndication vs. keeping shows for its own platforms — it turned down an offer for “Sex and the City” last year. But, said Bewkes, “I think you will see significant revenue from syndication sales of HBO series in the future — and not just the (shows) you know.”

He sees video-on-demand as the second arm of HBO’s growth, given the net’s access to pics and its many digital channels. Such reach “can attract a wide range of talent so (the net’s) not particularly impacted by the success or failure of any one show,” Bewkes said.

“Sex and the City” enters its last season this summer. And HBO recently settled a bitter salary dispute with “The Sopranos” star James Gandolfini.

HBO vid sales, a burgeoning market for the past few quarters, shot up 134% on the release of B.O. smash “My Big Fat Greek Wedding.”

Homevid also buoyed AOL TW’s larger filmed entertainment biz despite a lackluster theatrical perf. Company cited tough comparisons with last year and fewer releases. Studio looks to two more installments of “The Matrix” and the next “Lord of the Rings” to liven up the rest of 2003.

Meanwhile, DVD revenue shot up 97% to $658 million for the quarter as Warner cornered 21% of the DVD market and 8.5% of vid. That helped overall filmed entertainment sales to rise 11% to $2.3 billion. Operating income surged 61% to $183 million.

“Last year we made more money from DVD than any of our competitors and effectively (eliminated) our reliance on Blockbuster,” Bewkes said, defending the studio’s controversial focus on the DVD sell-through market.

Warner Bros. Television had 40 original series on broadcast and cable, Bewkes said, noting that half of the company’s TV rev comes from syndication.

At Time Warner Cable, a 33% drop in advertising and higher programming costs squashed operating income by 5% to $359 million. But subscription rev rose 9% to $1.8 billion as customers signed up for new services.

Logan, the former head of Time Inc. who oversees the cable unit, called it one of the few industries that can look forward to strong revenue growth in coming years. He surprised Wall Streeters by noting that the company has installed some 100,000 of its own TiVo-like personal digital video recorders.

“Consumers like these boxes and they want them. As they get more convenient, we’ll see a continued spurt in growth. We are in the business of providing consumers what they want, and if we don’t do it, someone will,” he said.

But unlike TiVo and rival Replay, Parsons added about the company’s hardware, “you can’t skip commercials or send what you record over the Internet.”

AOL TW stills hopes to raise several billion dollars in an IPO of Time Warner Cable, the nation’s second-largest cable op, later this year. But Parsons said the SEC will certainly have a role in the process, which could affect the timing.

“We have to think about alternative ways to go home in case one road is blocked,” he said. He was talking about ways to reduce AOL TW’s heavy debt, which stood at $28.5 billion at the end of March.

AOL TW said Wednesday that it wants to unload its music manufacturing biz. But execs didn’t mention a sale of the Atlanta sports teams or the book publishing unit, which are also on the block.

Probes by the SEC and the Dept. of Justice seem to focus on accounting issues at America Online. Parsons had no new news on the inquiries Wednesday. “It remains one of my highest priorities to continue to work with regulatory and investigatory agencies,” he said.

Online situation

At AOL, revenue fell 4% to $2.2 billion as ad revenue plunged 42%. Operating income rose 11%, mostly due to the absence of restructuring charges that hit a year ago. Company had 26.2 million domestic subscribers at the end of March, down 289,000 from the fourth quarter.

AOL did add 368,000 subs in Europe, where it’s got 6.3 million. It recently launched MusicNet on AOL and a host of new features for broadband customers.

Parsons and Logan reminded investors that 2003 is a transition period for AOL. Many insiders believe that the conglom will unload the unit if it doesn’t start to improve by year’s end. “We are making progress on all fronts,” Logan said.

He said new registrations dropped off recently “because everyone was watching the war on TV.” AOL’s new marketing campaign is just getting into full swing and the Netco is still in the early stages of developing premium services it hopes will draw big bucks from members.

At AOL TW’s publishing biz, revenue rose 7% to about $1.2 billion on stronger ad sales led by People, In Style, Real Simple, Time and Entertainment Weekly. Operating income fell 13% to $81 million on a decline in Time Life, a $10 million hike in pension costs, $12 million in restructuring charges and the purchase of Synapse.

Glossy picture

Logan was upbeat on the future of mags — 38 million people read People, he noted, outstripping any top-rated TV series — but he was cautious near term as the war and the economy may soften ad numbers in the second half.

At Warner Music, revenue dipped 3% to $914 million. Unit swung to an operating loss of $14 million from a profit of $20 million the year before. AOL TW cited ongoing weakness in the worldwide music industry — but noted a smash debut this quarter for Linkin Park’s “Meteora,” which sold 810,00 units in its first week, a record for Warner.

AOL TW reassured Wall Street by affirming financial guidance for the rest of the year. That means revenue growth in the mid-single digits from $41 billion in 2002 and cash flow up in the low single digits from $8.7 billion. At AOL, total revenue will be flat, ad revenue down 35%-45%% and cash flow flat to about 10%.

AOL TW said its latest financial report was retooled to comply with new SEC regs. The rules, which won’t let companies adjust their numbers to account for restructuring and other charges, ended up chopping several million dollars off of last year’s figures and helped the latest quarter look brighter in comparison.

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