Cable Drives Time Warner’s 2Q


Time Warner Inc. reported stronger-than-expected second-quarter results, posting a $1 billion profit driven by strong gains at its cable unit.

The company reported net income of $1 billion (20 cents per share) on revenue of $10.7 billion (up 1%). Adjusted operating income before depreciation and amortization (AOIBDA, a measure of cash flow) was up 7% to $2.7 billion.

Driving those results was strong performance at its Time Warner Cable operations, which completed its $16.9 billion joint acquisition of Adelphia Communications with Comcast July 31. While the second-quarter results did not include Adelphia, in a prepared statement, Time Warner chairman and CEO Richard Parsons said the acquisition will serve to make a strong division even stronger.

“With the closing of the Adelphia-Comcast transaction, Time Warner Cable is now focused on integrating and upgrading the acquired systems and setting the stage for an aggressive deployment of Time Warner Cable's advanced digital-video, high-speed-data and digital-phone services in the coming months,” Parsons added.

Revenue at the cable operations rose 15% to $2.7 billion and AOIBDA increased 16% to $1 billion. Basic-cable subscribers rose by 18,000 during the period (its fourth consecutive quarter of basic-customer growth), digital-cable subscribers rose by 117,000 (its largest second-quarter increase since 2002), high-speed-Internet customers by 230,000 and digital-phone subscribers by 234,000.

In addition to the Adelphia transaction, Time Warner said it was notified by Comcast of its desire to dissolve its 50-50 partnerships in Kansas City and Texas. As a result, as of Aug. 1, Time Warner assumed full control of systems in Kansas City, southwest Texas and New Mexico, while Comcast assumed control of systems in Houston. Time Warner will also receive $600 million in cash.

According to the partnership agreement, each party had the option of triggering a dissolution, with the remaining party given the right to choose from the two pools of subscribers -- the Kansas City pool, with 789,000 subscribers, and the Houston pool, with 790,000.

On a conference call with analysts discussing second-quarter results, Parsons said the main factor in picking the Kansas City systems was Comcast’s offer to assume all of the debt -- about $2 billion, according to the 10-Q -- of both partnerships.

“As we looked at it, with the transfer of virtually all of the debt to the Houston pool -- we liked the systems in both pools -- we simply concluded that the greater value from our shareholders’ point of view was to take the Kansas City, southwest Texas and New Mexico pool,” Parsons said on the call. “Had they made a different allocation, we might have made a different judgment.”

At its cable networks -- which includes HBO, Turner Broadcasting System and Court TV -- revenue increased 9% to $2.7 billion and AOIBDA increased 9% to $696 million.

Time Warner said it was still pursuing a two-track strategy for the proposed spin of its Time Warner Cable unit into a publicly traded entity.

The first would require Time Warner to file a registration statement for an initial public offering of Time Warner Cable stock by Jan. 31. In that scenario, Adelphia -- which would receive 16% of Time Warner Cable shares (Time Warner would own 84%) -- would be required to sell one-third of that stake to the public within three months of the IPO.

The second option is waiting until Adelphia completes its reorganization under Chapter 11 of the U.S. Bankruptcy Code, which would essentially make Time Warner Cable a successor to Adelphia. Adelphia said late last month that it had reached agreement with some of its bondholders regarding a reorganization plan, and it hoped to close the books on the bankruptcy by the fourth quarter.

On the call, Parsons said Time Warner hasn’t made a decision yet, adding, “We’ve been focused on getting Adelphia closed.”

Time Warner shares were up 36 cents each to $16.61 per share in early trading Wednesday.