NEW YORK (CNN/Money) -
Time Warner Inc. said on Wednesday that it saw third-quarter earnings rise slightly more than Wall Street forecasts, but it set aside $500 million to settle an accounting probe by federal regulators and plans to restate some prior results.
The world's largest media company said it earned $717 million, or 15 cents a share, from continuing operations excluding special items, in the quarter. It said that compares to income of $551 million, or 12 cents a share, from continuing operations in the year-earlier period.
Analysts surveyed by earnings tracker First Call had forecast EPS of 14 cents.
Shares of Time Warner (Research) rose on the news. The price was up nearly three percent in New York Stock Exchange trading by early afternoon. CNN/Money is a unit of Time Warner.
The company reported income from continuing operations (including special items) of $494 million, or 10 cents a share. That excludes a gain from the sale of a stake in Internet search engine Google, which increased EPS by 4 cents.
"Time Warner had another strong quarter on an operating basis against some tough comparisons," CEO Richard Parsons told analysts during an early morning conference call. "I continue to be very enthusiastic about the performance of our businesses."
Probe could cost $500M
Time Warner said it had not yet settled the investigation into accounting practices at America Online, its online unit. But it said that it has established $500 million in legal reserves related to pending government investigations, which it said reduced earnings per share by 9 cents in the period.
Parsons reminded analysts that the probes are ongoing, but that they had reached a point where the company could estimate its potential liability.
"We are not able to predict what the outcome will be or when it will come," said Parsons. The reserve, he said, reflects the fact that the investigations "have progressed significantly enough to give the company some visibility into the (potential) costs."
The federal investigation into accounting problems at AOL had been disclosed long ago. Many of the problems involve AOL when it was an independent company, before the Internet service provider purchased Time Warner in a deal that closed in 2001.
The company said it expected to restate its 2000 and 2001 revenue and income lower due to a change in accounting for its interests in AOL Europe prior to 2002. While it did not formally restate those earlier results with this statement, it said it expected revenue in 2001 would drop $810 million and it could be left with a net loss of $5.1 billion rather than the $4.2 billion net loss previously reported. It said 2000 revenue would likely drop by $640 million and net income could decline by about $300 million to reach $813 million.
It said the $500 million reserve is its best estimate of the cost to settle those probes and various shareholder suits pending against the company.
Eyeing Adelphia
Time Warner officials also publicly confirmed for the first time that they are considering a bid for bankrupt cable operator Adelphia Communications. Now the country's fifth-largest cable company, Adelphia has put itself on the auction block. A deal is expected early next year.
It's too soon to tell whether Adelphia, valued at $17 billion or higher, will be sold as one company or sold in pieces. But Parsons confirmed Wednesday that Time Warner is talking with Comcast Corp. (down $0.14 to $29.15, Research), the No. 1 cable operator and a minority shareholder in Time Warner Cable, about a potential joint bid.
Adding cable subscribers is key as Time Warner bets on selling customers on "triple play" bundles of video, voice and broadband services. But a sole play for Adelphia would likely weigh on Time Warner's stock price.
"We are looking at Adelphia right now and we are working with Comcast at the moment," said Parsons. "We think that's smart for a lot of reasons."
Broad gains across units
In other company news, the AOL unit continued to lose subscribers during the quarter, as 22.7 million subscribers at the end of the quarter represented a drop of 646,000 during the period and a 2 million decline from a year earlier. That produced a $52 million, or 3 percent, drop in subscription revenue.
But, overall, the online unit saw revenue edge up 1 percent to $2.1 billion, as ad revenue posted a gain mostly from its domestic paid search business. Operating income also climbed at AOL. Still, the company said it would need to take a $50 million restructuring charge in an upcoming quarter. A source familiar with the matter confirmed reports that the unit plans to cut about 700 jobs from its U.S. staff of 13,000.
Rob Sanderson, an analyst with American Technology Research, said he was unimpressed by AOL's performance in the quarter. "They put up good advertising sales, but had more dial-up (subscriber) losses than I was looking for."
He also expressed disappointment with the number of new broadband subscribers, which, at 470,000 for the quarter, was less than he had expected. Still, he noted that AOL's push into broadband service is still early.
"If the numbers keep trading down for a bunch of quarters, then maybe we'll get nervous," said Sanderson.
Parsons, however, said AOL was on the rebound and expressed frustration that investors remain skeptical about the company.
"I do think that when clouds roll in, it takes a while for them to roll out of the sky even though a lot of good work has been done underneath," said Parsons. "We're optimistic that, given time and the right type of exposure, the Street will begin to see real value there."
Other units of the company generally saw gains. All the units saw improved revenue and only its filmed entertainment unit, which includes Warner Bros. and New Line Cinema, posted a slight decline in operating earnings. It attributed the drop to difficult comparisons to the year-earlier quarter when it had strong sales of the DVD for "Lord of the Rings: The Two Towers." Its cable operations, magazine publishing and television networks units all posted gains in operating incomes.
Overall revenue at the company rose 5 percent to $10 billion, edging out First Call's forecast of $9.9 billion.
The company reaffirmed its earnings and revenue guidance for the full-year 2004 results, but did not offer any guidance on 2005 outlook.
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