Time Warner Net Slides, Cable Loses 83,000 Basic Subscribers

AOL Continues Slumping; Buys Online-Advertising Company Quigo Technologies

Time Warner saw growth across its businesses in the third quarter except for AOL, where advertising revenue did not make up for the loss of subscription revenue.

Time Warner’s revenue rose 9% in the quarter to $11.767 billion from $10.75 billion in the same period a year ago. Net income for the quarter was $1.1 billion, or $0.29 per share, versus $2.3 billion ($0.57) in Q3 2006, which included income from discontinued operations and other one-time items.

Earnings per share before discontinued operations were in line with consensus estimates at $0.24 versus $0.33 in Q3 2006.

AOL revenues slid 38% in the quarter to $1.2 billion on a 56% decline in subscription revenue. The decline in subscription revenue of $820 million was due to sales of Internet-access businesses in Europe and declines in the United States as the company moves away from subscription access to an advertising-supported model.

Advertising revenue increased in the quarter by 13% or $61 million. The segment’s operating income was down 24% in the quarter to $295 million.

Separately, AOL announced that it agreed to purchase online-advertising company Quigo Technologies for an undisclosed amount.

Time Warner Cable, parent Time Warner’s largest revenue driver, reported a revenue increase of 25% to $4 billion in the third quarter largely attributable to acquired systems. Subscription revenue rose 25% to $3.8 billion with 21% growth in video to $2.5 billion, high-speed data 26% higher to $942 million and voice 57% higher to $308 million. Advertising revenue was up 24% to $221 million.

TWC’s operating income before depreciation and amortization (OIBDA) was up 28% to $1.4 billion as higher revenue was partially offset by higher video-programming costs attributable to new systems, expanding services and increases in contractual rates.

Operating income was up 24% to $681 million.

The company’s net income was $248 million, or $0.25 per share, versus net income before discontinued operations of $226 million ($0.23) in Q3 2006. Net income including discontinued operations in the year-ago period was $1.2 billion, or $1.20 per share.

TWC reported free cash flow of $778 million for the first nine months of the year.

The company lost 83,000 basic-video subscribers in the quarter but saw increases in other services. Digital subscribers rose by 128,000 in the quarter, while residential data subscribers rose by 224,000 and phone rose by 275,000. In total, revenue-generating units rose by 522,000 in Q3.

Filmed-entertainment revenue was up 33% to $3.2 billion on the back of strong theatricals such as Warner Bros.’ Harry Potter and the Order of the Phoenix. The film segment’s operating income was up 123% to $268 million.

TWC’s revenue and OIBDA are expected to grow for the full year at a rate in the mid- to high-30s off bases of $11.8 billion and $4.2 billion, respectively. Full-year free cash flow is expected to be $800 million-$1 billion. Those estimates are unchanged from the company’s previously announced guidance.

Time Warner's networks business, which includes HBO and Turner Broadcasting System, saw revenue rise 6% to $2.6 billion. Subscription revenues rose 7% on higher rates at HBO and Turner. Content rose 32% on ancillary sales of HBO programming. The decline in advertising revenue of 3% was due to shutting down of The WB in September 2006. Network operating income was up 45% to $751 million.

Publishing revenue was flat in the quarter at $1.2 billion as higher revenues while operating income was up 13% to $251 million.

Time Warner reaffirmed its full-year guidance for growth in adjusted OIBDA in the mid- to high-teens on a base of $11 billion in 2006, adding that it would convert 30%-40% into free cash flow. The company’s free cash flow through the first nine months was $4 billion, representing a 42% conversion rate. The company expects full-year earnings per share before discontinued operations and accounting changes of $1.07.

On Monday, Time Warner announced that CEO Dick Parsons will step down as of Jan. 1 and that current president and chief operating officer Jeff Bewkes will take his role. Parsons will remain the company’s chairman.