AOL Transformation Is Working

Time Warner Inc., the world's largest media company, said fourth-quarter profit rose 34 percent, helped by the purchase of Adelphia Communications Corp.'s cable-television unit.
Net income advanced to $1.75 billion, or 44 cents a share, from $1.3 billion, or 28 cents, a year earlier, the New York- based company said today in a statement. Sales gained 8.2 percent to $12.5 billion.
Time Warner Cable earnings rose 46 percent, helping validate Chief Executive Officer Richard Parsons' $16.7 billion purchase of Adelphia. Parsons is now focused on reviving AOL, offering free broadband service to attract users and advertisers. The stock has risen 33 percent in six months on optimism he will succeed.

``Cable continues to deliver the bulk of the free cash flow,'' said Tuna Amobi, an equity analyst at Standard & Poor's in New York. ``There are still some challenges with AOL ahead. It's going to be testing year for AOL.''
S&P's credit analysts have a BBB+ rating on Time Warner's debt, which jumped to $33.4 billion from $17.3 billion a year earlier because of the Adelphia acquisition, which also included swapping cable-systems with Comcast Corp., and the company's share repurchases.

Profit before one-time items was 22 cents a share, matching the average estimate of 17 analysts polled by Bloomberg. Net income was buoyed by a pretax gain of $769 million on the sale of AOL Web access units in France and the U.K., as well as $900 million in tax benefits.

Forecast
Shares of Time Warner, also owner of CNN and People magazine, fell 17 cents to $21.87 at 4 p.m. in New York Stock Exchange composite trading. Time Warner's six-month gain outpaced a 21 percent gain at News Corp. and an 18 percent rise at Walt Disney Corp.

A year after fending off a campaign from billionaire Carl Icahn to break up the company, Parsons, 58, is starting to reap the benefits of keeping the assets together. He implemented a $20 billion share buyback at Icahn's urging, helping boost per- share earnings. Revenue in 2006 rose 4 percent to $44.2 billion, while net income more than doubled to $6.6 billion.

Profit in 2007 will be about $1 a share, including 10 cents for a gain in the sale of an AOL unit in Germany, Time Warner said today. Adjusted operating income before depreciation and amortization will rise in the ``mid-to-high teens'' from $11.1 billion last year, the company said.
Earnings will rise at each unit in 2007, Parsons said on a conference call. In 2006, operating profit fell at three of Time Warner's five businesses: AOL, the film unit and the magazine publishing unit.
Cable Customers
Stamford, Connecticut-based Time Warner Cable lured customers with packages of cable, high-speed Internet access and broadband services. About 1.5 million subscribers, or 10 percent of the total, subscribe to the so-called triple-play package.

Time Warner Cable added 211,000 digital phone subscribers, lower than the 220,000 estimated by Sanford Bernstein analyst Michael Nathanson. The unit also added 246,000 high-speed Internet access subscribers.
``We are focused on digesting the rather substantial mouthful,'' of Adelphia, Parsons said in an interview.
Sales at the unit rose 58 percent to $3.65 billion. Adjusted operating income before depreciation and amortization jumped to $1.31 billion from $899 million.
``The Adelphia deal looks like a multibillion dollar bet that was well timed,'' said Larry Haverty, an associate portfolio manager at Gamco Investors Inc. in Rye, New York.

Court Decision
Time Warner owns 84 percent of the business and is awaiting a court decision on Adelphia that would pave the way for trading in Time Warner Cable shares owned by former Adelphia bondholders. Time Warner also filed for an initial public offering of the division last year as a backup plan in case the creditors don't come to an agreement.
``It's in the hands of the court right now,'' Parsons said. He declined to say whether Time Warner may sell some of its own stake to the public. ``In fullness of time, we'll look at what's the right structure,'' he said.
AOL reported its first quarter under new leadership. Parsons then hired NBC veteran Randy Falco to replace Jonathan Miller at the helm of AOL in Dulles, Virginia, to help accelerate growth in online ad sales.
Sales fell 7.8 percent to $1.86 billion, exceeding analysts' estimates of $1.8 billion. Profit dropped 10 percent to $302 million.

Free E-mail
AOL, struggling to compete for visitors with Google Inc. and Yahoo! Inc., in September offered its e-mail and software for free to U.S. broadband users. The decision prompted an exodus of U.S. subscribers from the Internet access service.
The unit's Web access service lost 2 million U.S. subscribers in the quarter, fewer than the 2.6 million analysts had predicted, for a total of 13.2 million. Advertising sales gained 49 percent.
AOL this month offered to buy TradeDoubler AB, a Swedish Internet ad company, for about $900 million. The offer is ``entirely full and fair,'' Parsons said.
At the film division, sales slumped 15 percent to $3.09 billion, missing the $3.5 billion average estimate of five analysts. Profit dropped 39 percent to $240 million.
The tepid performance of Time Warner movies at the box office in the summer led to lower home video sales in the fourth quarter. DVD releases including ``Superman Returns'' weren't enough to match DVD sales of ``Harry Potter'' a year earlier.

Publishing
Time Inc., Time Warner's magazine publishing unit, struggled to fuel circulation and advertising sales growth. The division cut almost 300 jobs and last week agreed to sell 18 titles to Bonnier Magazine Group to focus on boosting sales at Time, People and Sports Illustrated.
Revenue at the publishing unit was little changed at $1.54 billion. Profit rose 3 percent to $427 million.
Time Warner's 6.875 percent bonds maturing in 2012 fell 0.02 cent to 105.52 cents on the dollar, according to Trace, the bond-price reporting system. The yield was 5.64 percent. The price is down from a year high of 107.8 cents on Dec. 11.

The perceived risk of owning Time Warner's bonds rose. Credit-default swaps based on $10 million of the company's bonds gained to $30,665 from $29,815 yesterday, according to data compiled by CMA Datavision in London.
The five-year contracts, which investors use to speculate on a company's ability to repay debt, have fallen from a year-high of $72.5 in January 2006.

Bloomberg.com