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Wednesday, September 3, 2008

AOL Remains Sticking Point for Time Warner

Ad Revenue Stalls; Publishing Unit Is Drag on Earnings

Seven months into the job, Time Warner Inc. Chief Executive Jeff Bewkes's biggest move to reinvent the company has been a spinoff of the cable business. But now he faces a much bigger problem: AOL.

Time Warner reported a 26% decline in second-quarter net income Wednesday, as its Time Inc. publishing unit burned a hole in earnings, countering strength in its television networks and movie studio. The biggest drag on profit, however, was AOL, where advertising unexpectedly stalled.

AOL's bumpy transition from a subscriber-based model to an advertising model has dented Time Warner's performance in recent quarters, putting pressure on the company to consider ways to unload it.

Time Warner announced Wednesday it had completed the work necessary to separate AOL's Internet-access business from its core advertising business in 2009, paving the way, Mr. Bewkes said, "to do something strategic with either of these businesses today."

Time Warner is in talks with both Yahoo Inc. and Microsoft Corp. about a possible deal that could value its core advertising and portal business at about $10 billion. It has also had informal contact with possible buyers for its smaller, Internet access business, including Earthlink Inc.

Mr. Bewkes is under pressure to revive Time Warner's long-stagnant stock price with some bold moves. In April, he unveiled long-awaited plans to spin off Time Warner Cable Inc., focusing the company more acutely on its content businesses. He also cut costs by folding the New Line movie studio into Warner Bros. Now the spotlight is fixed firmly on solving AOL.

For the quarter ended June 30, Time Warner reported net income of $792 million, or 22 cents a share, down from $1.07 billion, or 28 cents a share, in the year-earlier period. Revenue rose 5% to $11.6 billion. Last year's earnings were boosted by the sale of a book business and by tax benefits.

Mr. Bewkes said both AOL and Time Inc. have fallen behind his expectations, weighed down by the advertising slowdown.

Faced with sharp revenue declines in the first quarter, executives had predicted that AOL's ad growth would show some improvement. But AOL reported slim gains, which failed to make up for deep declines in subscribers, stirring concerns about the success of the unit's shift in strategy.

Advertising growth, which decelerated in the previous four quarters, stalled at 1.5%, dragged down by a 14% slump in display ads. The unit posted a 36% decline in operating income.

Mr. Bewkes said AOL was still struggling with integrating recent acquisitions made in pursuit of its new strategy. But he added that "there continue to be encouraging signs about the underlying health of the business," and the company predicted that ad sales would improve in the second half of the year.

Time Warner has held discussions about selling AOL before, but a deal has always proved elusive, in part because of disagreements over valuation. Mr. Bewkes wants to conclude current talks on the core advertising business, however, before turning to the Internet access business.

A bright spot in earnings was the cable-TV networks business, which largely bucked the ad downturn. The division, home to CNN and HBO, reported an 11% rise in advertising and 18% increase in operating income. The Warner Bros. movie studio also had a strong quarter, boosted by DVD sales of "I Am Legend" and "The Bucket List."

Time Warner shares, which have fallen 10% this year, slipped 5 cents, or 0.3%, to $14.83 in 4 p.m. New York Stock Exchange composite trading.

By: Merissa Marr
Wall Street Journal; August 7, 2008