Cable Drives Time Warner Growth; Cuts Planned at Corporate, New Line

CEO Jeff Bewkes Touts Cable Business, Ponders Changes with Time Warner Cable, AOL

By Anne Becker -- Broadcasting & Cable, 2/6/2008 12:40:00 PM

In its first quarter with Jeff Bewkes as CEO, Time Warner reported a 41% loss in fourth-quarter profits Wednesday but a 17% percent jump in adjusted profits.

In a conference call with investors, Bewkes touted the strength of cable TV, movies and digital endeavors, such as video-on-demand; announced impending cost cuts at the corporate level and within film division New Line Cinema; and said the company would immediately re-examine the ownership structure of Time Warner Cable.

The adjusted quarterly growth reflected strength in cable television, as well as movies. The drop followed last year’s sale of AOL’s European online-access business.

Bewkes said the company would look for overall success with three missions -- operating the business with better performance and return than its competitors; focusing on the right businesses and structures; and managing the balance sheet and deploying capital to the right places.

The investment community is looking to Bewkes to make big changes at Time Warner to turn around its struggling stock, which is down 29% from last year.

“The danger, for us, of prior success is complacency, and we can’t afford that,” Bewkes said.

Bewkes announced two areas of cuts -- reductions of more than 15% at the corporate level, which he said would trim the company’s run rate by $50 million per year, and cost cuts at New Line. He said the company still sees value in having two separate studio infrastructures in New Line and its Warner Bros. Entertainment, but it would take action “fairly soon” to streamline New Line.

The company’s movie- and TV-production divisions posted 46% earnings growth on a 13% gain in revenue -- a strong quarter fueled in part by the record December opening of Will Smith film I Am Legend.

Bewkes, long an advocate for VOD, talked up the TV divisions’ strength with multiplatform projects, like HBO’s VOD offerings, CNN.com and Time Warner Cable’s “Start Over” function, and called for all linear cable networks to make their content available on-demand -- both on the Internet and on VOD.

“We think [doing so] will cement the long-term prospects of these businesses,” he added.

Bewkes said Time Warner would immediately review the ownership structure and its 84% ownership of publicly traded Time Warner Cable, which he called “less than optimal.” With cable stocks struggling, unloading much of the division is unlikely. But Bewkes said that after discussion with Time Warner Cable’s management and board, he expected to reach a decision on whether and how to change that structure by the time the company reports first-quarter results at the end of April.

“Nobody should think we’ve lost faith in cable’s business products,” he said. “Quite the opposite: We think it’s undervalued -- substantially undervalued. It’s maybe best not positioned within Time Warner.”

The division posted earnings growth of 19% on a 12% gain in revenues for the quarter, due in part to its acquisition of systems from former rival cable operator Adelphia Communications. But while it has pumped money into its premium phone and Internet services, the company reported losing 50,000 basic-video subscribers, feeding Wall Street’s fears about competition in the video space from telephone companies.

Bewkes cited strong growth prospects in the division’s residential business and projected future growth with small to midsized commercial customers, as well as potential growth by leveraging set-top targeting, but he stressed the consistent level of investment needed to drive revenue growth.

Much of Wall Street’s focus on Time Warner has centered on AOL. The investment community has favored Time Warner selling AOL, although that option has been complicated by Microsoft’s recent bid for Yahoo, both of which would have been likely bidders for the division.

AOL reported a 29% earnings increase even with a 32% drop in revenues. The division is facing growing pains as it gets out of the dial-up Internet business -- having lost 3.8 million dial-up access subscribers over the past year -- and tries to grow advertising.

Bewkes drew attention to AOL having stabilized its page views and said Time Warner was aiming to grow usage on its network of Web sites, to extend its competitive position in terms of advertising and to complete its business-model transition, separating its Internet-access and audience business to run independently. Last year, AOL sold its U.K.- and France-based Internet-access businesses for a pretax gain of $769 million.

Time Warner reported overall net income of $1.03 billion for the quarter, or 28 cents per share. Last year’s fourth-quarter income was $1.75 billion (44 cents). Revenue was up 2% to $12.64 billion. The company expected to report full-year-2008 earnings of $1.07-$1.11 per share.