Time Warner Posts Profit, Expands Probe

Wed Jul 28, 2004
By Kenneth Li

NEW YORK (Reuters) - Time Warner Inc. (TWX.N: Quote, Profile, Research) , the world's largest media company, on Wednesday posted a better- than-expected quarterly profit, but said it widened an internal investigation at its online division.

The company, whose accounting methods at the AOL Europe unit has been under investigation by federal regulators, said it expanded an internal investigation of accounting at AOL to include its European unit, which could result in a restatement of financial statements.

Time Warner shares fell 1.54 percent to close at $16.65 amid a broad sell-off of media shares on Wednesday.

The New York-based media conglomerate said second-quarter net profit dropped to $777 million, or 17 cents a share, from $1.06 billion, or 23 cents, a year earlier.

The 2003 quarter included gains of 12 cents per share from the sale of Comedy Central cable channel and a settlement with Microsoft Corp. (MSFT.O: Quote, Profile, Research)

Total revenue in the latest quarter rose 10 percent to $10.9 billion.

Analysts, on average, expected the company to post a 15 cents a share profit and revenue of $10.44 billion, according to Reuters Estimates.

AOL, which lost 2.2 million subscribers in 2003, continued the trend, losing 668,000 subscribers in the second quarter. But a 23 percent surge in advertising revenue, its first in three years, helped push profits 13 percent higher.

"The strength of the AOL cash flow and billed subscribers were better than investors were expecting and an increase in full-year guidance is clearly a good sign," said Richard Greenfield, an analyst at Fulcrum Global Partners.

PROBE INTO AOL EUROPE

Time Warner said it has begun an internal investigation of how it accounted for its 2002 purchase of AOL Europe, which has been the target of an investigation by the U.S. Securities and Exchange Commission. The SEC is also probing advertising transactions in the U.S. online unit.

The company noted that while it previously has stood by its accounting for the AOL Europe transaction, its talks with the SEC could lead it to reconsider its views of its accounting.
"Clearly this investigation is not over," said Tom Wolzien, media analyst at Sanford C. Bernstein. "At this point you'd think it was getting locked down. But it's widening instead of contracting."

Legal experts said the company may have discovered new information.

"Their interpretation may be that the SEC is onto something," said Jacob Frenkel, a former SEC enforcement lawyer and federal prosecutor, now a partner at law firm Smith, Gambell & Russell, LLP.

"The fair question is what has changed to warrant the (internal) investigation? If the decision to investigate is driven by a desire to make voluntary disclosure to the SEC, it may be too late to get credit because of how long this issue has been in play."

CASH FLOW BURNING A HOLE

Investors are now worried that Time Warner, which cut its debt to $18.1 billion from a crippling $30 billion in early 2003, is now expected to make potentially costly purchases. Analysts said they are likely pursuing bankrupt cable operator Adelphia Communications Corp. (ADELQ.PK: Quote, Profile, Research) and film studio Metro- Goldwyn-Mayer Inc._(MGM.N: Quote, Profile, Research) .

"I hope their cash flow doesn't burn a hole in their pocket," said Brian Steinberg of Steinberg Global Asset Management, whose firm owns 45,000 shares of Time Warner. "The wounds are healing, but the patient hasn't recovered yet."

Dick Parsons, CEO of Time Warner, defended the company's plans to look at potential acquisitions.

"We have an interest in the company in expanding the cable footprint," he said. "When you think about the long term, you look for ways to extend your competitive advantage in all those areas."

The company raised its profit outlook and expects operating income before depreciation and amortization, excluding items, to rise in the low-double-digits to low-teens percentage range, from $8.7 billion in 2003.

It also raised targets for America Online, seeing growth in adjusted operating income before depreciation and amortization to reach the low-to-mid-teens range, compared with $1.5 billion in 2003.

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