Time Warner Climbs on Cable, AOL Regroups

Time Warner’s profits for the second quarter were up about 5.2 percent, thanks largely to the strength of its cable division, the company reported Wednesday.

Net profit for the quarter was US$1.067 billion, or 28 cents per share, up from $1.014 billion, or 24 cents per share, a year earlier, the company reported. Revenue was up 6 percent to almost $11 billion.

Time Warner is the parent company of AOL, CNN, HBO, Warner Bros. Studios, Fortune and Sports Illustrated.

‘Firmly on Track’

“I’m pleased with Time Warner’s solid results for the quarter,” said chairman and CEO Dick Parsons. “Our performance over the first half of 2007 keeps us firmly on track to achieve all of the company’s full-year financial objectives.

“Driving this quarter’s profits were gains at our cable, publishing and networks segments,” Parsons said. “Most importantly, our earnings per share delivered double-digit growth, benefiting from our recently completed stock repurchase program.”

AOL revenues declined 38 percent to $1.3 billion, resulting from a 55 percent decrease in subscription revenues as the company makes the transition from a subscription-based business model to an advertising-based one, the company said. Cable revenues, on the other hand, rose by 59 percent, or $1.5 billion, to $4.0 billion.

More Buybacks

Time Warner also announced Wednesday that its board of directors has authorized a new $5 billion stock repurchase program. That news comes as the company just finished completing a $20 billion buyback of about 1.1 billion shares of common stock, or about 23 percent of the total outstanding shares at the program’s inception.

Time Warner’s stock fell 92 cents, or about 4.8 percent, in Wednesday morning trading.

Successful Strategies

“I think it was a good report, very much on target with expectations,” Jim Goss, an analyst at Barrington Research, told the E-Commerce Times.

“While AOL’s revenue base was slightly below what I expected, profitability was somewhat higher,” Goss added. “They’ve been successful at cutting some of the network costs, and their strategy seems to be successful, with things working in their favor.”

The films division had a soft quarter, Goss noted, but it was expected, as costs associated with films like “Harry Potter and the Order of the Phoenix” were incurred in the second quarter, while revenues won’t appear until the third quarter. “I thought it might have been worse,” he added, “and there will be greater momentum in the second half.”

‘Very Smart’

Indeed, Time Warner has a number of new offerings and strategies that paint a rosy picture for its future, Gerry Kaufhold, principal analyst with In-Stat, told the E-Commerce Times.

For example, Time Warner’s StartOver feature for cable subscribers, which allows viewers to restart a show if they missed the first part of it, promises to be very successful, particularly as the company expands it over the next year, Kaufhold said.

While the company was under “a lot of heat to divest itself of AOL, in the long run, it will look very smart for keeping it,” Kaufhold added. “AOL is certainly going through a turnaround, but I think it’s past the crisis point now, and is starting to recoup some of its brand awareness,” he explained.

“It was a very bold and risky strategy to turn AOL from a subscription-based model into a content provider for Internet and mobile, but they’ve so far been able to successfully hit their benchmarks on this massive turnaround,” Kaufhold added. “It’s not done yet, but the indications are that it’s working.”

Looking forward, as more and more media companies put TV content on the Internet, “AOL will have a place to play there, and its value may come back up,” he added.

No Respect

In general, Wall Street does not treat cable operators well, Kaufhold noted, despite the tremendous gains they’ve made with new offerings and gaining subscribers. As a result, several operators have been buying back their stock over the past 8 or 9 quarters as a way of reducing their exposure, he said.

“When major cable operators report that they haven’t lost any subscribers over a quarter, that’s a really solid statement, given that they’re competing with satellite, U-verse, FiOS and the like,” Kaufhold said.

“The cable guys are able to compete, and Time Warner’s earnings report underscores the point that they are running their business well,” Kaufhold concluded. “Wall Street is not giving them a big thank you for it, so now they’re buying their stock back.”