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Time Warner's Profit Soars on TV, Film Gains

AOL continues to lose subscribers. News of subpoenas for CEO and the former chairman overshadows earnings.

October 23, 2003|Richard Verrier and Jonathan Peterson | Times Staff Writers

Humbled media giant Time Warner Inc. made more money than expected in the third quarter, though the results announced Wednesday were overshadowed by the continuing federal probe into its accounting practices.

The company, which dropped "AOL" from its corporate moniker last week, has been trying to remake itself for more than year. It was created by the January 2001 merger of the old Time Warner and Internet service provider America Online, a union that produced massive losses and disastrous results for shareholders.

On Wednesday, Time Warner said its rebuilding efforts bore fruit in the recent quarter, when it earned $541 million, or 12 cents a share, compared with $57 million, or 1 cent, in the same period a year ago. Revenue rose 4% to $10.3 billion.

Although its key America Online division continued to struggle, the companywide results, driven by gains in its cable systems, TV networks and Warner Bros. film studio, exceeded analysts' estimates. The studio's operating income jumped 21% in the quarter on improved theatrical and home video sales, led by "The Matrix Reloaded" and the "Lord of the Rings" franchise.

"These were good, very healthy results, and a continuing part of the rebuilding process for the company," said Jeffrey Logsdon, an analyst with Harris Nesbitt Gerard.

Still, Wall Street reacted coolly, sending Time Warner's shares down 49 cents to $15.06 on the New York Stock Exchange.

The results were released on the same day that reports surfaced that the Securities and Exchange Commission had subpoenaed Stephen M. Case, the former chairman of the company, and current Chairman and Chief Executive Richard D. Parsons, along with several senior executives, as part of its investigation into the company's accounting of an advertising deal.

The subpoenas were reported Wednesday by the New York Times. Neither the SEC nor the company would comment. Case, who is still on Time Warner's board, was not available for comment.

The SEC investigation of Time Warner's accounting practices has been ongoing for more than a year.

In March, Time Warner disclosed in an SEC filing that regulators were investigating whether the company improperly accounted for up to $400 million in revenue in an advertising deal with German media concern Bertelsmann. Time Warner has said its accounting was proper.

Legal experts Wednesday said the subpoenas suggested that investigators were trying to pin down highly specific knowledge by high-level managers about AOL's deal with Bertelsmann. At the same time, the experts cautioned that the issuance of the subpoenas didn't indicate that the probe was near its end or that particular individuals were in legal trouble.

"It could be that possible acts or omissions by these officials are within the immediate focus of the investigation," said Jacob S. Frenkel, a former prosecutor and SEC enforcement attorney now at Smith Gambrell & Russell in Washington. "But it does not mean that any decisions have been made about who to charge -- if anyone -- and what to charge -- if anything."

One issue in the probe is whether $400 million in advertising purchases on AOL by Bertelsmann was improperly linked to AOL's acquisition in 2000 of Bertelsmann's 49% stake in AOL Europe. Liz Young, a spokeswoman for Bertelsmann, said the German company had nothing to say about the subpoenas. "Bertelsmann is not under investigation, and this is a Time Warner issue."

Columbia University law professor John Coffee suggested that the SEC might simply want to ask Case, Parsons and other executives whether AOL and Bertelsmann had ever discussed any linkage between the price AOL paid for Bertelsmann's interest in AOL Europe and Bertelsmann's purchase of advertising from AOL.

"They wouldn't be able to feel they had conducted a thorough investigation without getting on-the-record statements from the parties who were involved in these critical negotiations," Coffee said.

Time Warner executives did not discuss the SEC probe in a conference call with investors. Instead, they touted the company's rebuilding efforts.

"We posted strong results in the third quarter and continued to make solid progress against our key objectives," Parsons said in a statement.

The networks division, which includes TNT, TBS, HBO and CNN, posted a 9% increase in operating income as advertising and subscription revenues rose.

But AOL continued to struggle, losing 688,000 subscribers during the quarter, leaving it with 24.7 million in the U.S. It has been steadily losing customers to higher-speed Internet services offered by rivals.

Executives, however, touted successes in the building of AOL's own high-speed Internet business.

Warner Music Group posted an operating loss of $1 million, contrasted with an operating profit of $22 million a year earlier. The company said it expected to record a charge of up to $1.6 billion in the fourth quarter, reflecting worldwide declines in the music business. Time Warner is negotiating to sell the recorded music division to British music giant EMI Group.

Time Warner Cable's operating income rose 6%, driven by growth of high-speed data and digital video services, subscriber increases and higher cable rates. The publishing unit, however, posted a 25% drop in operating income, reflecting a decline in ad revenue and higher pension expenses at Time Inc.

Analysts had expected Time Warner to report a profit of 9 cents a share, according to a survey by Thomson First Call.

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