Time Warner to Spin Off Time Warner Cable, Reports Mixed Q1 Earnings

CEO Jeff Bewkes: Separation of Time Warner Cable Imminent

By Glen Dickson & Robert Marich -- Broadcasting & Cable, 4/30/2008 1:24:00 PM

Media conglomerate Time Warner finally committed to spinning off its 84%-owned cable operation, Time Warner Cable, after floating the possibility for several years.

In announcing Time Warner’s first-quarter earnings -- which showed strong results from the cable unit and Time Warner’s programming networks but continued declines at its AOL unit -- CEO Jeff Bewkes said the separation of Time Warner Cable, the country’s second-largest operator behind Comcast, was imminent. But no details were immediately given on how the Time Warner Cable stock would be separated.

“We’ve decided that a complete structural separation of Time Warner Cable, under the right circumstances, is in the best interests of both companies’ shareholders,” Bewkes said in a statement. “We’re working hard on an agreement with Time Warner Cable, which we expect to finalize soon. At the same time, we’ll continue to pursue the rest of our aggressive agenda that we believe will deliver increasing value to our shareholders.”

In Time Warner earnings for the quarter ended March 31, net income slid 1% when excluding $670 million in one-time gains during the year-ago period from proceeds from asset sales. The company earned 21 cents per diluted share from continuing operations, one cent less than the consensus forecast of stock analysts, compared with 31 cents a year ago that was inflated by the year-ago asset sales. Excluding those asset sales, per-share earnings were flat.

Including the year-ago asset-sale gains, Time Warner net income declined 36% to $771 million. Revenues rose 2.1% to $11.42 billion from $11.18 billion.

“Our results this quarter -- particularly the underlying operating strength at our cable, networks and filmed-entertainment businesses -- gave us the confidence to reaffirm our full-year business outlook,” Bewkes said in a statement.

Time Warner’s networks segment –- which includes the Turner Broadcasting System basic-cable networks and HBO -- shined with revenue climbing 10% to $2.7 billion in the quarter. A 23% spike in program costs to $907 million due mostly to the National Basketball Association on Turner, which is nonrecurring, held down the segment gain in operating income to just 2%, or $874 million.

In an investors’ earnings conference call, Time Warner brass talked up prospects at the Turner networks from investment in more original programming. Bewkes said new programs are in development with filmmaker Ridley Scott and comedian Ray Romano, and he sees the Turner entertainment channels emerging as challengers to the broadcast networks. Bewkes added that while other media companies expand in cable niches, Time Warner’s strategy is to make investments in the mainstream, such as general entertainment programs.

In the earnings press release, the company added, “In the quarter, for the first time in six years, CNN ranked No. 1 in primetime delivery among cable news networks in its key demographics, adults 18-49 and adults 25-54.”

The current quarter was depressed by a one-time $116 million restructuring charge related to consolidating its New Line Cinema movie studio into Warner Bros.

In providing investors guidance, Time Warner forecasted that adjusted operating income before depreciation and amortization will rise 7%-9% for the full year. That’s a healthy gain given the weak economy.

Time Warner Cable’s operating income was $636 million, up from $579 million in last year’s first quarter. Sanford C. Bernstein analyst Craig Moffett noted the cable unit’s strong performance in a research report, highlighting the fact that Time Warner Cable added 55,000 new basic-cable subscribers despite heightened competition from telephone-company competitors like Verizon Communications. That beat consensus estimates from Wall Street analysts of a loss of 32,000 basic subscribers.