The five-year chart for Motley Fool Stock Advisor recommendation Time Warner
Overall, third-quarter results were mixed. Revenue increased 5% and net income fell 7.8%. What was impressive was the near tripling of free cash flow to $1.4 billion. Hurting income was a $500 million legal reserve for "pending government investigations" at the AOL unit -- and, since a reserve for shareholder and civil litigation has not been established, you can expect more reserves!
While AOL's revenue increased an anemic 1%, operating income surged 74% (not including the legal reserve) because of a sharp reduction in network expenses. Overshadowing the earnings news is a 646,000 decline in subscribers in the U.S. and 8,000 in Europe -- and no clear way for AOL to steal customers away from cash-rich content providers such as Google
Time Warner's Cable division produced a 10% increase in revenue and operating income because of strong growth in digital video and digital data services.
The Filmed Entertainment unit saw a 1% decline in revenue and a 4% drop in operating income. While the company was No. 1 in the U.S. in home video sales and rentals, the previous year's home video release of The Lord of the Rings: The Two Towers was too much to top.
Networks (Turner, HBO, WB Network) saw revenues climb 8% and operating income increase 13%. TNT was once again the No. 1 ad-supported cable network for delivering adults ages 18-49 and 25-54 during prime time. Publishing revenue increased 3% and operating income climbed 28% on the strength of advertising revenue.
Time Warner's 11.1% operating margins this quarter are below those at competitors Disney
If it were not for AOL, Time Warner would be an easy story to tell. But because of AOL and the ongoing government investigations, the outlook is clouded.
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Fool contributor W.D. Crotty, a movie fanatic, owns stock in Disney and News Corp.