TW’s tangled web

Stock drops as AOL offsets pumped pics

NEW YORK — Healthy increases from filmed entertainment and cable divisions picked up the slack from AOL Time Warner’s ailing Web division, as the company reported Wednesday that overall profit for the second quarter had tripled compared with last year.

But AOL TW stock declined nearly 7% to $15.71 as the company also revealed that the SEC has concluded that AOL did misallocate some of the $400 million it received from Bertelsmann when it sold its 50% stake in AOL Europe. As a result, AOL may be staring at another earnings restatement, though it continues to deny its methodology was illegal. The SEC’s probe is continuing into other America Online transactions, with no resolution in sight.

The $1.06 billion in profits was due in part to hefty one-time gains on its $750 million Microsoft settlement and the $1.2 billion sale of its 50% stake in Comedy Central to Viacom.

Total sales for the quarter rose 6% over the year-earlier period to $10.8 billion, while operating income before depreciation and amortization (the SEC’s mandated replacement name for EBITDA) fell 4% to $2.2 billion, including noncash charges.

Company upped its guidance for the full year: Sales growth should be up in the middle single digits over the $41 billion posted in 2002.

Film fab

Filmed entertainment had another solid quarter, with some $700 million in worldwide box office for “Matrix Reloaded” catapulting the film unit’s total operating income up 26% to $330 million. Part of that gain also was due to the $43 million sale of its U.K. theater chain.

Division revs were up over 15% on last year to $2.76 billion. Company credited strong TV sales from “Friends” and “Seinfeld,” for which Turner recently extended its license.

For the first half of 2003, Warner Bros. Pictures and New Line generated $572 million and $239 million, respectively, in domestic B.O. for a combined market share of just under 20%.

Warner Bros. TV, which will produce a record 27 series for the fall 2003-04 primetime season, will have its income dented due to deficit financing but is expected to reap dividends in the future.

Parsons also warned that despite the film unit’s strong theatrical lineup for the late summer and fall, the second half of 2003 would face tough comparisons over last year, when its wholly owned titles like “Austin Powers in Goldmember” and “The Lord of the Rings: The Two Towers” delivered greater bottom-line profits. This time around, Warner hedged its ownership through pre-sales of certain rights.

Losing subs

The AOL unit is still the biggest corporate sore point, though cost-cutting efforts are alleviating the pain of its declining core dial-up Internet service provider business. AOL lost a hefty 846,000 subscribers in the quarter, though some 380,000 of those were nonpaying subs the company voluntarily dropped from its rosters. Speaking to analysts Wednesday morning, CEO Richards Parsons noted that the new focus at AOL will be on profitability rather than sub and rev gains.

Company warned investors that full-year revenues at the online unit will fall roughly 5% from 2002’s $9.1 billion. Ad revenue there is expected to slump between 35% and 45% compared with $1.3 billion in 2002.

Parsons said key strategic priorities include stabilizing the AOL business and returning it to double-digit growth, making prudent investments to deliver shareholder value and cooperating with the SEC and DOJ in their ongoing investigations.

Parsons praised strong performances from the TV group and anticipated increased growth from strong upfront ad sales.

Chief financial officer Wayne Pace noted that the company was well on target with its debt-reduction plans, having reduced its load to $2.2 billion at the end of the quarter.

IPO back-burnered

With its balance sheet cleanup largely successful, Parsons confirmed that plans for the Time Warner Cable IPO are on the back burner. But he noted that the company still stands by plans to grow in that area.

“We like the cable business and would like a bigger footprint in a consolidating marketplace,” Parsons said, adding that there may be a strategic reason to have cable-only currency to be a player in that business.

Parsons said SEC considerations will affect when it can stage an IPO.

Among the highlights from other AOL TW divisions:

  • Networks: Strong gains at Turner, the WB and HBO pushed revenues up 10% for the quarter to $2.16 billion, thanks to 17% average increases in ad sales and industry-consistent 6% increases in subscriptions. A $178 million charge on the value of its Hawks and Thrashers sports teams resulted in an 18% decline in operating income. Entertainment chief Jeff Bewkes said the nets maintained modest new subscriber and affiliate fee gains in line with industry growth rates.

  • Cable: Though basic subs inched up barely 0.9% in a typically slow second quarter, the Time Warner cable division boosted operating income by 6% off of sales of $1.92 billion. Unit ended the quarter with 4.1 million digital subs and 2.9 million cable modem customers.

  • Music: Operating income plummeted to $6 million from $29 million last year due to big depreciation charges and a sluggish music publishing biz. Still, the company found a glimmer of hope in this sinking business as its market share edged up slightly to 18% with margins holding steady at 10%. There’s no word yet on the state of its planned merger with BMG. Revs were up 8% to around $1 billion, aided in part by foreign-exchange bonuses and strong showings by Cher, Linkin Park and Madonna.

  • Publishing: A tight ad market and the Iraq war led to only a slight 1.8% increase in revenue for the publishing unit. But a $100 million writedown in value of the AOL Time Warner book group led the division to a 42% drop in operating income to $164 million.

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