Time Warner: A Glass Half Full
Time Warner’s stock has been flogged back below $17, down from its 52-week high of $19 and close to the low for the period. Institutional investors and the press have suggested that the company be broken up or that some of the units be spun out into a new public company. The failure of the AOL merger still bedevils the current management and shareholders.
Looking at the company’s results and recent plans, the picture is not nearly a bleak as it has been painted by some critics.
AOL is certainly a shrinking franchise, and it may require substantially more cost cutting to improve margins. In the quarter ending March 31, revenue dropped 7% to $1.98 billion. The silver lining is that advertising revenue rose 26% and nearly offset the drop in subscription revenue. With the explosion of online advertising, it is entirely possible that the advertising pick-up at AOL could more than offset the attrition in subscription, especially if AOL.com and other free sites that company owns see improved traffic in future quarters. In the last quarter, operating income at AOL dropped 14% to $269 million, which may be an indication that further cost cuts are in store, especially to get full leverage from the ad revenue growth and its potential contribution to income growth.
Time Warner’s cable business is unusually healthy, which may be the reason that some investors would like to see it as a separate unit. Total revenue for cable rose 15% last quarter to $2.58 billion. Operating income did even better, rising 25% to $501 million. High speed data revenue rose an impressive 24% to $612 million and digital phone service was up 338% percent to a modest $140 million. As demand for voice over IP grows, it is likely that this segment will be a larger and larger component of the cable operations in future quarters. While the telcos are trying to offer high speed internet, video channels and phone service as a combined package to compete with Time Warner and other large cable operators, the potential success of these programs is several years off.
Owning movie studios has always been a choppy business and Time Warner’s film and TV production operations are no exception. This part of the company saw revenue decline 8% in the last quarter to $2.997 billion. Due primarily to improvement in the cost of revenues, operating income was up 22% to $386 million.
Time Warner’s network operations, which include properties like HBO, the WB network and Turner properties, had a modest revenue increase last quarter of 3% to $2.351 billion. Operating income rose 7% to $788 million.
The company’s publishing operations showed flat revenue in the March quarter at $1.226 million and operating profits dropped 13% to $71 million.
One of the major concerns that investors have about the company is its debt. At the end of last quarter, the company had over $20 billion in debt and $2.3 billion of cash and investments.
Those are the numbers, and some of them are not as pretty as shareholders would like. The issues at AOL and the publishing operations will have to be taken care of by a combination of further cost cutting and well-planned programs to take advantage of a good advertising environment, especially online.
But, Time Warner is now a company with all of the bad news priced into the stock. It is probably not a stock that reflects the efforts of the management to improve operating results. One of these is the combination of the operations of the WB network and UPN. Small television networks are expensive to operate relative to revenue, and the combination of these two should improve margins for the new entity.
AOL’s agreement with Google, in which the search company essentially buys 5% of AOL for $1 billion, has some advantages for both companies. AOL can provide content to Google, and Google’s targeted advertising programs can make advertising purchases on AOL properties more effective.
Time Warner Cable’s agreement with Comcast to acquire the assets of bankrupt Adelphia will significantly boost the number of basic subscribers it serves and potentially improve revenue per customer as broadband and VoIP adoption improve.
Short interest in the company’s stock increased 8 million shares to 52.9 million, one of the largest increases for any company traded on the NYSE, so there are still plenty of investors ready to bet that the company’s shares will fall further. But, there are several events that could improve the company’s fortunes.
The release of Superman in the next month could give the film unit of the company a significant improvement in revenue.
The change over from dial-up to broadband could actually begin to favor AOL as internet advertising, including video program with video ad support, growth and delivers higher cost per thousand ad rates for large internet portals.
The increase in broadband and VoIP demand should fuel faster growth at the company’s cable operations.
The rise of video use over the internet will begin to expand the revenue options for Time Warner’s studio and TV productions as will the increasing use of VOD by cable subscribers.
Time Warner’s stock is not likely to go much lower. But, if one or two of the initiatives that management has announced materialize, the stock has the opportunity to move up to levels it has not seen in four years.
Douglas A. McIntyer is the former Editor-in-Chief and Publisher of Financial World Magazine. He has also been president of Switchboard, Inc. which was, according to MediaMetrix, the 10th most visited site on the internet at the time. He has been CEO of FutureSource and On2 Technologies, Inc. He has also served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about.
Looking at the company’s results and recent plans, the picture is not nearly a bleak as it has been painted by some critics.
AOL is certainly a shrinking franchise, and it may require substantially more cost cutting to improve margins. In the quarter ending March 31, revenue dropped 7% to $1.98 billion. The silver lining is that advertising revenue rose 26% and nearly offset the drop in subscription revenue. With the explosion of online advertising, it is entirely possible that the advertising pick-up at AOL could more than offset the attrition in subscription, especially if AOL.com and other free sites that company owns see improved traffic in future quarters. In the last quarter, operating income at AOL dropped 14% to $269 million, which may be an indication that further cost cuts are in store, especially to get full leverage from the ad revenue growth and its potential contribution to income growth.
Time Warner’s cable business is unusually healthy, which may be the reason that some investors would like to see it as a separate unit. Total revenue for cable rose 15% last quarter to $2.58 billion. Operating income did even better, rising 25% to $501 million. High speed data revenue rose an impressive 24% to $612 million and digital phone service was up 338% percent to a modest $140 million. As demand for voice over IP grows, it is likely that this segment will be a larger and larger component of the cable operations in future quarters. While the telcos are trying to offer high speed internet, video channels and phone service as a combined package to compete with Time Warner and other large cable operators, the potential success of these programs is several years off.
Owning movie studios has always been a choppy business and Time Warner’s film and TV production operations are no exception. This part of the company saw revenue decline 8% in the last quarter to $2.997 billion. Due primarily to improvement in the cost of revenues, operating income was up 22% to $386 million.
Time Warner’s network operations, which include properties like HBO, the WB network and Turner properties, had a modest revenue increase last quarter of 3% to $2.351 billion. Operating income rose 7% to $788 million.
The company’s publishing operations showed flat revenue in the March quarter at $1.226 million and operating profits dropped 13% to $71 million.
One of the major concerns that investors have about the company is its debt. At the end of last quarter, the company had over $20 billion in debt and $2.3 billion of cash and investments.
Those are the numbers, and some of them are not as pretty as shareholders would like. The issues at AOL and the publishing operations will have to be taken care of by a combination of further cost cutting and well-planned programs to take advantage of a good advertising environment, especially online.
But, Time Warner is now a company with all of the bad news priced into the stock. It is probably not a stock that reflects the efforts of the management to improve operating results. One of these is the combination of the operations of the WB network and UPN. Small television networks are expensive to operate relative to revenue, and the combination of these two should improve margins for the new entity.
AOL’s agreement with Google, in which the search company essentially buys 5% of AOL for $1 billion, has some advantages for both companies. AOL can provide content to Google, and Google’s targeted advertising programs can make advertising purchases on AOL properties more effective.
Time Warner Cable’s agreement with Comcast to acquire the assets of bankrupt Adelphia will significantly boost the number of basic subscribers it serves and potentially improve revenue per customer as broadband and VoIP adoption improve.
Short interest in the company’s stock increased 8 million shares to 52.9 million, one of the largest increases for any company traded on the NYSE, so there are still plenty of investors ready to bet that the company’s shares will fall further. But, there are several events that could improve the company’s fortunes.
The release of Superman in the next month could give the film unit of the company a significant improvement in revenue.
The change over from dial-up to broadband could actually begin to favor AOL as internet advertising, including video program with video ad support, growth and delivers higher cost per thousand ad rates for large internet portals.
The increase in broadband and VoIP demand should fuel faster growth at the company’s cable operations.
The rise of video use over the internet will begin to expand the revenue options for Time Warner’s studio and TV productions as will the increasing use of VOD by cable subscribers.
Time Warner’s stock is not likely to go much lower. But, if one or two of the initiatives that management has announced materialize, the stock has the opportunity to move up to levels it has not seen in four years.
Douglas A. McIntyer is the former Editor-in-Chief and Publisher of Financial World Magazine. He has also been president of Switchboard, Inc. which was, according to MediaMetrix, the 10th most visited site on the internet at the time. He has been CEO of FutureSource and On2 Technologies, Inc. He has also served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about.
posted by douglas mcintyre at 9:36 AM
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