Time Warner Inc. (NYSE: TWX) announced that it turned a billion dollar profit in the latest quarter and that it would go forward with its strategy to stop promoting AOL's dial-up service. With TWX up over 2% in early trading, it's clear that investors were pleased.
But is today's announcement a buy signal for the beleaguered stock? It might be. Despite declines in TWX's magazine, film and AOL units, the digital services and network businesses appear to be booming. However, the logic for keeping all these businesses under the same corporate umbrella eludes me.
To figure out what to keep and what to divest, it's worth analyzing today's announcement.
By my reckoning, Time Warner has two businesses worth keeping, two it should dump, and one that may be worth turning around. This is based on the performance and prospects of its five businesses as revealed in today's announcement:
INVEST
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Cable. With revenues up 15% and operating income up 22% I think cable has great prospects -- there is growth in high speed Internet, digital phone, and enhanced digital video. With its purchase of Adelphia, Cable's prospects look bright;
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Networks. With revenues up 9% and operating income rising 8%, I think Networks is likely to remain a solid cash generator for TWX shareholders. I think it should continue to invest in keeping its programming quality high so it can keep generating solid growth.
- Filmed Entertainment. With revenues down 11% and operating income up 11%, I think Filmed Entertainment is a great business for TWX to sell. Despite the fun it must provide TWX executives, it is very unpredictable, it has high capital costs, and it is a drag on TWX stock;
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Publishing. With revenues down 2% and operating income declining 8%, I think the Publishing segment is likely to continue to decline. Despite the ego boost of owning iconic brands like Time and Fortune, the Publishing segment should be sold to free up cash to invest in the keepers.
QUESTION MARK
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AOL. With revenues down 2% and operating income declining 5%, I think AOL must either be fixed or sold. Whether it can pull off the advertising-based strategy remains to be seen. I am skeptical that AOL can generate enough advertising revenue to offset the lost subscriber fees, but pending layoffs could boost profitability. With the decision to try the new strategy already behind us, I think the board should monitor the progress of the new strategy and be prepared to pull the plug quickly or change the strategy if AOL doesn't produce the expected results.
Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, and a Professor of Management at Babson College. He has no financial interest in the securities of Time Warner.
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Reader Comments (Page 1 of 1)
8-02-2006 @ 11:09AM
douglas mcintyre said...
Time Warner's success in the last quarter may be the first glimpse of why Carl Icahn could have been wrong about breaking up the company. Results at the magazine publishing division and film units were lackluster, but investors should expect that there are more cost cuts to be made, which gives the divisions the chance for improved margins.
Cable, the mother of all that has been good at the company, saw revenue increase 15% to $2.7 billion. The company's broadband subscriber base also grew to 5.4 million, up 230,00 from last quarter. Wall St. assumes that this business will get even better with the acquisition of certain asset of Adelphia which closed recently.
The company's network business (TNT,HBO,CNN,TBS) also did well with revenue up 9% to $2.7 billion.
The surprise was AOL. The argument against giving away its content instead of aggressively marketing the service as an ISP was compelling if AOL's advertising growth was tepid. But, ad revenue rose 40% at AOL.com, a rate faster than most of the industry. The WSJ projects that providing AOL free to many of its current paid base could dig a hole of $1 billion a year. Wall St. was skeptical that ad revenue could replace this quickly. The current quarter's AOL results indicate that the plan has a sporting chance of working.
The merger between AOL and Time Warner was based on "synergies" that later proved to be false. But, that door swings both ways. With video becoming critical to web success, assets like the Warner studio operations become more valuable than they were when revenue came solely from theater and DVD revenue. Studio revenue will always be choppy as film units go from blockbuster to failure and back again. But, the digital age is driving up the inherent value of those assets. Video content, which the company has in abundance, and video advertising will be critical to AOL's success. Internet video advertising now commands CPMs that are in the same league as the inventory sold by traditional networks.
As for the Time, Inc. publishing division, which is the original foundation of the company, the debate will continue. Falling circulation and rising printing and postal costs will undoubtly make this business more difficult, but closing magazines with little of no margins and cutting staff costs is probably a faster way to unlock value that trying to peddeling them off in pieces, espcially if one looks at the failure of the Knight-Ridder newspaper auction to create value.
Time Warner was reaching the point where the Parson's agenda seemed almost hopelessly flawed. Now, there is a ray of light that says the company's long-term program may just work.
With the stock down from $40 nearly five years ago to $16.65 today, the upside seems the more likely side.
Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies that he writes about.
8-02-2006 @ 7:26PM
Evans Juris said...
With AOL getting adelphia--ADELQ-what do you think will become of adelq stock