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Time Warner Profits Bruised by AOL Ad Losses

AOL and Time Warner earnings
Time Warner said today it is planning to separate all or part of AOL, the Web unit that has been a blight on the media conglomerate's balance sheet.

"Although the company's board of directors has not made any decision, the company currently anticipates that it would initiate a process to spin off one or more parts of the businesses of AOL to Time Warner's stockholders, in one or a series of transactions," Time Warner (NYSE: TWX) said in a filing with the Securities and Exchange Commission.

On a conference call this morning announcing Time Warner's first-quarter financial results, CEO Jeffrey Bewkes offered few further details about likely scenarios for AOL, which merged with Time Warner in a blockbuster acquisition deal in 2001.

"We intend to announce our plans about that very soon," Bewkes told analysts.

CFO John Martin said that Time Warner is in the process of buying back a 5 percent stake in AOL from Google (NASDAQ: GOOG) after the search giant signaled it wanted to unload its share in the unit.

"The next step in the process is an independent valuation of AOL, and the process will likely take a couple months," Martin said.

AOL, which saw double-digit declines in both its advertising and subscription revenues, continues to weigh on Time Warner's balance sheet. Sustained losses at AOL and Time Warner's publishing division contributed to a 14 percent decline in first-quarter profit, the company said.

Time Warner reported net income of $661 million, or 55 cents per share, down from $771 million, or 64 cents a share, in the first quarter of 2008. Excluding one-time items, Time Warner earned 46 cents a share, better than the 38 cents analysts were predicting, according to polling by Thomson Reuters.

Overall revenue for the quarter slipped 7 percent to $6.9 billion.

"Advertising at AOL and Time Inc. especially is proving even tougher than we envisioned when we talked just a few months ago," Bewkes said.

He nonetheless touted the media conglomerate's efforts to slim down and become a more streamlined enterprise.

"With our separation of Time Warner Cable, Time Warner has become a more content-focused company," he said in a statement, adding that it is "working to determine the right ownership structure for AOL."

Revenues at AOL plunged $261 million, or 23 percent from the year-earlier period, to check in at $867 million for the first quarter.

AOL's ad business saw revenues slip 20 percent from last year, a decline of $109 million the company attributed to weak performances in display advertising and ad sales on its third-party network sites. In the previous fiscal period, AOL's ad revenues dropped 18 percent on a year-over-year basis.

AOL's dial-up Internet subscription business, which Time Warner is in the process of separating from the media and ad side of the unit, saw first-quarter revenues drop 27 percent, or $146 million, continuing the trend of subscribers dropping dial-up service in favor of faster broadband connections. AOL ended the quarter with 6.3 million U.S. subscribers, losing 570,000 in the period and 2.4 million in the previous year.

In March, Time Warner hired Google ad executive Tim Armstrong to step in as CEO of AOL after showing Randy Falco the door. That move was widely seen as a precursor to spinning out AOL as a publicly traded media and advertising company, following the separation of the dial-up business.

Time Warner has also been engaged in discussions with Yahoo, Microsoft and others about some alternative deal with AOL, including a complete sale of the division.

Bewkes said that Armstrong is charged with "getting AOL back to industry-level growth rates," and that he hopes "to make AOL once again a must-buy for premium advertisers."

Time Warner completed the separation of Time Warner Cable in March. The company received a $9.3 billion cash dividend from the spinoff, which helped cut its net debt in half from the end of 2008.

Time Warner completed a 1-for-3 reverse stock split at the end of the quarter.

Update adds executive comments from conference call, information from SEC filing.