Cable Operators

Time Warner Prepares for AOL Woes

11/03/2004 4:18 AM Eastern

Time Warner Inc. said it has established a $500 million legal reserve tied to the ongoing federal investigations into accounting practices at its America Online Inc. Internet unit, adding that it will also restate AOL’s financial results for 2000 and 2001. Results in 2002 may also be affected, the company said.

AOL came under scrutiny from the Securities and Exchange Commission and the Department of Justice in 2002 regarding certain accounting practices at the unit and, later that year, it lowered its revenue by about $190 million resulting from some questionable advertising and commerce transactions.

The latest restatements stem from its AOL Europe division. Time Warner said in a prepared statement that given a put/call arrangement between AOL Europe and its then partner, Bertelsmann Group AG, Time Warner should have consolidated AOL Europe’s results on AOL’s balance sheet beginning in March 2000.

In a conference call with analysts discussing third-quarter results, Time Warner chairman Richard Parsons said the restatements and the $500 million reserve will have no effect on subsequent quarters.

“These are clearly significant matters,” Parsons said on the call. “We take them very seriously. That said, let me assure you all that our primary focus continues to be on managing our businesses and moving this company forward.”
Parsons also said Time Warner’s decision to create the reserve “reflects the fact that the investigations have progressed sufficiently to give the company some visibility into the costs required ultimately to resolve these investigations.” He added that Time Warner has no indication of when or how the government will conclude its probe.

That appeared to be enough for some analysts, who pointed to the reserve as an indication that the investigation could be winding down.

Investors also appeared to be unconcerned, driving Time Warner stock up 26 cents each in early trading Wednesday to $16.54 per share.

For the quarter, Time Warner said revenue was up 5% and adjusted operating income before depreciation and amortization rose about 9%, fueled mainly by growth at its cable division.

Time Warner Cable reported 10% increases in revenue and AOIBDA for the quarter. Basic subscribers were down by 11,000, but the unit had strong growth in high-speed-data (168,000 additions) and digital-cable (72,000) customers.

Time Warner Cable also said it nearly doubled the number of digital-video recorders in the field from the end of last year to more than 700,000 compared with 369,000 as of Dec. 31.

Time Warner Media and Communications Group chairman Don Logan said that while the basic-subscriber losses were unacceptable, improving marketing and customer care and pushing the bundled offering should help to bring those customers back.

On the video-on-demand front, Logan said Time Warner had 1.4 million subscription-VOD customers in the third quarter, about 30% of its digital base. He added that the most popular SVOD offerings were HBO On Demand, followed by My MC, a free-VOD music-video channel.

“In the future we’re going to provide more on-demand content, including a lot that is going to be free,” Logan said.

September