Mixed Marks for Time Warner

Updated from 7:20 a.m.

Time Warner posted a third-quarter profit and reaffirmed its 2003 financial outlook as a key probe of its bubble-era accounting burrowed deeper.

As expected, revenue was strong at the company's TV networks and cable operations, but relatively weak in film and the company's America Online unit. The continuing subscriber losses at AOL -- one of the key trends investors are following at the division -- were worse than analysts had expected.

For the third quarter ended Sept. 30, the multimedia conglomerate formerly known as AOL Time Warner posted a profit of $541 million, or 12 cents a share, reversing the year-ago loss from continuing operations of $55 million, or 1 cent a share. Revenue rose 4% to $10.3 billion, leaving the company shy of the $10.43 billion Wall Street consensus noted by Thomson First Call.

Time Warner said it expected 2003 to bring single-digit percentage rises in operating income before depreciation and amortization and revenue, amid a single-digit revenue decline at the struggling America Online unit on a 35%-45% ad revenue slip there. Operating income at AOL is expected to be flat to down from year-ago levels. Those comments were in line with remarks AOL Time Warner made in July.

Meanwhile, The New York Times reported that the Securities and Exchange Commission is questioning CEO Dick Parsons and former top executive Steve Case in connection with AOL's booking of advertising revenue in a deal with Bertelsmann.

Time Warner shares slipped a dime in premarket trading to $15.45.

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Third-quarter numbers were mostly solid. Operating income before depreciation and amortization -- the bottom line yardstick formerly known as earnings before interest, taxes, depreciation and amortization -- grew 9% to $2.28 billion. That figure is at the high end of analysts' expectations for the quarter. Growth would have been 11%, says Time Warner, without a $41 million noncash charge for impairment of intangible assets related to the expected sale of Turner Broadcasting System sports teams. OIBDA growth was strongest in the TV networks, cable and film businesses.

Net income amounted to $541 million, or 12 cents per share, up from net income from continuing operations of $57 million, or 1 cent per share, for the third quarter of 2002. Analysts had expected this quarter's profit to be 9 cents per share. The third quarter 2003 net income includes, on a pretax basis, a $41 million noncash charge for impairment of intangible assets, a $46 million restructuring charge, and a $127 million gain related to certain investments.

Free cash flow from continuing operations -- another financial measure Time Warner likes to call attention to -- fell from previously reported levels. It amounted to amounted to $697 million in the third quarter, compared to $1.51 billion in the second quarter of 2003 and $1.2 billion in the third quarter of 2002.

Time Warner's shares, which have spent the past 52 weeks ranging between $9.90 and $17.89, fell 17 cents Tuesday to close at $15.55.

America Online lost 688,000 U.S. subscribers in the three months ended Sept. 30 -- much more than the 500,000-member loss analysts had expected. The company now has 24.7 million members in the U.S., down 2 million from a year ago.

Time Warner's cable systems added 190,000 residential high-speed Internet subscribers, a closely watched measure of how well the company is selling advanced services. The number is down from 237,000 for the third quarter of 2002, and short of the high end of analysts' forecasts for this quarter.

On Time Warner's conference call with analysts, media and communications group Chairman Don Logan indicated that on a full-year basis, he expected the drop in cable modem additions to not be as significant as this quarter's performance might indicate.

Logan also expressed the possibility that Time Warner's rollout of digital video recorders might revive growth in digital video subscriptions -- another area in the company's cable business that has shown diminishing growth.

Looking ahead, Time Warner reaffirmed all previous financial guidance, including revenue growth in the "mid-single digits," from the $41 billion revenue base for 2002. For the full year of 2003, analysts are expecting $42.85 billion in revenue, representing 4.5% growth.

The company forecasts mid-single-digit growth for OIBDA as well, which -- assuming 5% growth -- would put the 2003 figure at $9.1 billion.

At the company's America Online unit, which the company has been struggling to set aright following the burst dot-com bubble and attendant revenue recognition controversies, the company is forecasting revenue to be down in the mid-single digits. AOL ad revenue will be down 35% to 45% from 2002 figures, says the company, and OIBDA will be flat to down in the mid-single digits.