Time Warner Looks Ahead to Future Without AOL

Time Warner this morning reported a 38 percent drop in profit for the third quarter, but executives were buoyed by a stronger-than-expected performance of the media conglomerate’s content group.

Part of the drag on Time Warner’s (NYSE: TWX) balance sheet will be shed by the end of the year, as the company reaffirmed its intention to complete the spinoff of AOL in December, undoing the much-ballyhooed mega-merger that took effect in January 2001.

“This separation is an important milestone for both companies,” Time Warner CEO Jeff Bewkes said this morning on a conference call with analysts. The spinoff, he said, “will enable both AOL and Time Warner even more to focus on our core businesses.”

In the third quarter, AOL continued to struggle with an under-performing ad business, with revenues in that segment down 18 percent, or $92 million, from the same period last year. That year-over-year loss was marginally better than the first two quarters of the year, when AOL’s ad revenues were off 20 percent and 21 percent, respectively, from the year-earlier periods.

“We saw only a slight improvement in advertising trends in the quarter,” CFO John Martin said. “Display and paid search both remain soft.”

The legacy dial-up business also weighed on AOL’s ledger, with 438,000 subscribers canceling service in the third quarter, leaving it with 5.4 million at the end of the period, down 2.1 million from the same period last year.

As for AOL’s future as a standalone public company, headed by former Google advertising boss Tim Armstrong, Martin said that layoffs and other cost-cutting measures were not keeping up with revenue declines.

AOL executives are exploring other options to improve the balance sheet, Martin said, though he quickly added, “It will be challenging to reduce its fixed cost basis much further.”

Asked about AOL’s strategy as an independent, Bewkes demurred, saying that Armstrong and his team are planning a “road show” in the coming weeks to talk up their plans for the company. In broad strokes, Bewkes said AOL plans to build its business around expansions of its more popular content verticals, communications products such as its instant-messaging client, and improved ad monetization, with a particular focus on local content and mapping applications.

“Basically AOL has a lot of scale, and they’ve got some very successful consumer products inside the AOL experience,” he said.

But with the spinoff just around the corner, Bewkes was more eager to champion the success of his company’s content offerings, such as HBO and Warner Bros., which lifted the firm ahead of analysts’ expectations for the third quarter, and put it on solid enough footing to raise its guidance looking ahead to the post-AOL era.

“We’re executing very well in spite of the tough economy,” he said. “These results gave us the confidence to raise our full-year outlook for 2009.”

Overall, Time Warner posted revenue of $7.1 billion, down 6 percent from the year-earlier period.

Net income plunged to $661 million, or 55 cents per share, down from $1.1 billion, or 89 cents per share, in the third quarter of 2008.

Excluding special items, Time Warner reported earnings of 61 cents per share, ahead of analysts’ expectations of 53 cents per share, according to polling by Thomson Reuters.

In addition to the AOL spinoff, Time Warner is restructuring its Time Inc. publishing business, where it is widely expected to cut jobs. Time Warner said it anticipates a $100 million charge related to the restructuring in the fourth quarter.

Bewkes voiced confidence for the long-term success of the publishing segment, describing the advertising downturn as “cyclical,” and noting that readers’ appetite for thoughtful, long-form reporting remains strong even in an increasingly real-time news environment.

“They want immediacy, but our research shows they also place increasing value on the depth of analysis,” Bewkes said. “Magazines still offer advertisers unparalleled reach and relevance.”

He said that the publishing restructuring will be “much more targeted” than the overhaul of the segment Time Warner undertook last year. The company plans to reduce the frequency of some titles, such as Fortune, and “continue to take a hard at underperforming titles,” Bewkes said.

He also spoke highly of the opportunity the burgeoning e-reader market holds for the magazine division, noting that new high-resolution color screens and video capabilities would be solid draw for advertisers.

“We view the emergence of e-reader as a critical opportunity for magazine to migrate their dual revenue stream to a digital model,” he said.

Time Warner also continues to expand its partner base for its TV Everywhere initiative, where customers who subscribe to HBO or other premium channels can access the content on-demand on the Web.

Following the publishing restructuring and the AOL spinoff, which follows the move earlier this year to separate Time Warner Cable, Time Warner expects to shore up its balance sheet by focusing on its high-revenue entertainment content.

The company raised its guidance for 2009 to project earnings of $2.05 per share, up from its earlier estimate of $1.98.

Update adds comments from conference call with analysts.

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