By Rick Aristotle Munarriz
February 6, 2008
Like any bloated media conglomerate, it takes Time Warner (NYSE: TWX) a little time to get around. The media giant's fourth-quarter earnings got a boost from double-digit revenue gains at its film and Time Warner Cable (NYSE: TWC) divisions. However, in a cluttered mosaic of holdings that includes everything from CNN to TNT to HBO, AOL remains a three-letter enigma.
Time Warner posted mixed results in this morning's earnings report. Revenue inched just 2% higher, to $12.6 billion. Earnings held up better, but only after you backed out a laundry list of one-time items, including asset-sale gains and impairment charges. On an apples-to-apples basis -- tricky to visualize, in this mixed-up fruit basket of a company -- income per share from continuing operations climbed from $0.22 to $0.29.
As everyone expected, offering America Online subscribers with their own Internet connections free access to AOL's content whacked subscription revenue. The service's paying subscribers are now down to just 9.3 million U.S. users -- its lowest count since the dial-up days of 1997. AOL's access base peaked six years ago, when it safeguarded 26.7 million subscribers. After quarter upon quarter of defections, it now seems that AOL stands for Another Online Low.
However, AOL aims to make up that lost subscriber income by luring more visitors to its free sites. By slashing the overhead required to service its paying accounts, and devoting more resources to growing ad-supported page views, AOL hopes to pump up its profits. Though it's too early to rule on that strategy's success, it's refreshing to see adjusted operating profits at AOL, before depreciation and amortization, actually climb 29% despite the top-line freefall.
AOL isn't the only company grappling with fallen fences. Print giants like New York Times (NYSE: NYT) and News Corp.'s (NYSE: NWS) The Wall Street Journal seem to be perpetually tweaking their premium online models.
AOL's role is diminishing at Time Warner. The fourth quarter marks the first time since it became a part of Time Warner that AOL contributed less than 10% of the company's revenue mix. Ideally, a wealth of high-margin online ad revenue will help AOL contribute more -- perhaps a lot more -- to the bottom line than it does to the top. Even in this transitory quarter, operating margins at AOL clocked in higher than those of Time Warner as a whole.
With Google (Nasdaq: GOOG) as a paid-search partner and a growing portfolio of ad networks in its arsenal, AOL may become a spark plug in a tired Time Warner engine. Only one question remains: Will AOL contribute that spark as a part of Time Warner, or spin off on its own?
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