Strong profits hurt by film division
NEW YORK — Warner Bros.’ cold streak for a big chunk of ’06 took its toll as studio profits sank last quarter — offset in part by a strong perf at Time Warner Cable and progress at troubled AOL.
Nevertheless, parent Time Warner saw a 34% hike in profits for the quarter to $1.75 billion. The bump was due largely to a $770 million gain on the sale of AOL’s businesses in France and the U.K. The sale of AOL Germany is expected to close soon.
Revenue rose 8% to $12.5 billion.
Chief operating officer Jeff Bewkes, during a conference call with Wall Streeters, acknowledged a rocky integration of Adelphia subscribers in Los Angeles. He figures customers will keep bailing in the first half of the year, then be wooed back in the second.
Chairman-CEO Richard Parsons indicated TWC’s spinoff remains in limbo as a bankruptcy court judge continues talks with Adelphia creditors.
Studio profits tumbled 48% to $155 million for the three months ended in December. Revenue dipped 15% to $3.1 billion: For the year, earnings and revenue both fell 11% to, respectively, $784 million, and $10.6 billion.
Execs cited tough comparisons with “Harry Potter and the Goblet of Fire,” “Charlie and the Chocolate Factory” and “Batman Begins” in ’05.
Plus, Warners released a string of box office duds from “Poseidon” to “Lady in the Water” to “The Ant Bully.” Even “Blood Diamond,” a costly pic, disappointed. Winners like “The Departed” and “Happy Feet” weren’t able to salvage the year.
TV Networks, Turner Broadcasting and HBO, saw profits rise 11% to $778 million for the quarter: Revenue grew 10% to $2.7 billion.
Time Warner Cable, the nation’s second-largest provider, is struggling to integrate systems acquired from Adelphia Communications last June. Comcast was in the deal, too. In L.A., for instance, systems from all three cablers are being merged, and the changeover has been rocky.
TWC lost 52,000 subs last quarter between L.A. and Dallas.
“We have had issues. One is related to channel lineup. Every time you change the lineup, you have to expect customers’ calls, and we got them,” Bewkes said. “Second is the migration of high-speed data customers. … We are in the middle of resolving it. We will figure it out this year.”
He noted that Time Warner’s “legacy,” or pre-Adelphia systems, gained 29,000 new customers.
He sees plenty of financial upside from the deal down the line. Margins at Adelphia systems are 10% lower than at TWC, he said, and there’s a $15 gap in revenue per customer.
TWC profit rose 26% to $633 million for the quarter. Revenue grew 58% to $3.7 billion.
Time Warner said it had 13.4 million basic video subscribers at the end of last year — of which 6.2 million subscribe to two or more primary products, meaning video, high-speed Internet and phone service, and 1.5 million have all three.
Asked about moves by Verizon to compete with cable by offering video, Bewkes said he thinks TWC’s seamless bundling of many services makes it hard for telcos to compete.
“Overbuilding only covers 3% of our footprint. We really don’t see (telco) video, while it will compete, as a particularly critical or difficult challenge for us,” he said.
Parsons said TWC is rolling out a commercial phone system for small to midsized business later this year; exploring advanced advertising with greater targeting and interactivity; and testing a wireless offering.
The TW topper indicated that the listing of TWC as a separate public company is dragging on.
It’s an unusual situation. On one hand, Time Warner has filed with the SEC to launch an IPO of the cable company. But it has also been waiting on another option: that of distributing new TWC shares to Adelphia creditors as part of the bankruptcy agreement.
“We have simultaneously been moving toward both those,” Parsons said. He noted that the judge in the bankruptcy case had approved a stay until Feb. 6 at the request of creditors, “and I cannot say if it will be extended.”
At AOL, fourth-quarter earnings jumped to $913 million from $170 million, on the gain from the sale of its overseas ops: Revenue fell 8% to $1.9 billion.
Netco, under new leader Randy Falco, continues to pursue a radical revamp, announced in August, of moving from a subscription to an advertising model, offering itself for free to folks who get their broadband service elsewhere.
The idea is that users will stick with AOL and ad revenue will eventually offset declining subscription fees.
Ad revenue grew 49% last quarter — about 30% of AOL’s total revenue, compared with 19% the year before.
Domestic analog subs fell by 2 million for the quarter and 6.3 million for the year. AOL had 13.2 million subs at year end.
AOL had 111 million average monthly domestic unique visitors, about flat from the year before; and 44 billion domestic page views, slightly down, according to one analyst.
About 3 million subs switched from paying to nonpaying and 3 million new accounts signed up.
In publishing, led by Time Inc., income rose 6% to $384 million: Revenue eased 1% to 1.5 billion.
In a tough climate for magazines, the division had been retrenching and focusing on its online properties. It agreed last week to sell Time Inc.’s Parenting Group and Time4 Media titles — 18 in all — to Bonnier, a Swedish media group. Other titles are for sale, and the publisher just laid off nearly 300 people.
TW’s net debt stood at $33.4 billion at year end as it continued to buy back stock. It will complete its $20 billion repurchase by the end of the first half.
TW also paid out about $900 million in dividends in ’06.
Time Warner stock was down 0.77% Wednesday, closing at $21.87.
But the shares have had an amazing run over past several months, and are up nearly 40% from their 52-week low of $15.70.
“We believe that all of our hard work has paid off in the stock,” Parsons said. “But we are far from satisfied.”