NEW YORK (CNN/Money) -
Earnings fell at Time Warner Inc., as the world's largest media conglomerate missed Wall Street forecasts and announced Wednesday that it is setting aside $3 billion to settle securities litigation.
The New York-based company earned about $850 million, or 18 cents a share, excluding special items and including the increased reserves for litigation. That's down from $882 million, or 19 cents, it earned on that basis a year earlier. Analysts surveyed by earnings tracker First Call had forecast EPS to stay at 19 cents.
Taking into account special items -- including the litigation settlement -- Time Warner (Research) reported a net loss of $321 million, or 7 cents a share. It was the first quarterly loss since the company took a huge $45.5 billion charge in the fourth quarter of 2002 to reflect the loss of value of assets following the 2001 merger that formed the current company.
Revenue slipped to $10.7 billion, compared with $10.9 billion a year earlier. That is also below the First Call forecast, which had also called for a 1 percent rise in revenue.
The securities litigation deals with accounting practices at America Online, the Internet service provider that agreed to purchase Time Warner in 2000, a deal that closed in January 2001. Other units of the company include Warner Bros. and New Line studios, Turner Broadcasting, Time Inc. magazines and Time Warner Cable, the nation's No. 2 cable operator. CNN/Money is a unit of Time Warner.
The company reiterated its full-year earnings guidance and announced plans to repurchase up to $5 billion of its own shares. Still, the stock was down about 2 percent in early trading . One analyst said the results weren't as bad as they appear at first blush, though.
"On the surface, the numbers look bad, but when you dig into them you see health," said Greg Gorbatenko, analyst with Marquis Investment Research, in a note to clients. "Moreover, the $5 billion share buyback just announced is exactly what we would recommend. Lastly, while the quarter looked soft due to comps, it should be temporary, as compared to long-term health in the growing cable business, which is why we believe the company can keep to its guidance."
Time Warner Cable saw both revenue and operating income rise more than 11 percent in the quarter, even as the number of basic cable customers slipped slightly. Increased sales of higher-priced services such as digital cable, high-speed Internet service and digital telephone service helped improve results.
The company's AOL unit reported it lost another 917,000 subscribers in the quarter, leaving its subscriber base down 2.6 million to 20.8 million, a decline of 11 percent. The company lost even more subscribers among those paying $15 or more a month -- that core group fell 1.2 million subscribers in the month and 3.2 million from a year ago. Those paying less than $15 a month actually gained in the quarter and from a year ago.
Don Logan, chairman of the company's Media & Communications Group, told analysts during a conference call that the drop was due to a deliberate decision to move away from the traditional dial-up business that has limited profit potential long-term. He said the company was able to trim costs in line with the drop in customers.
That subscriber loss led to a $168 million drop in subscriber revenue, which outweighed a $99 million increase in advertising revenue. Still, the unit saw operating income increase by a third to $368 million, moving it ahead of the profit contributions from the publishing and studio units.
The filmed entertainment unit was the only other segment that saw a year-over-year revenue decline as revenue fell 15 percent. The company blamed difficult comparisons to the year-earlier period, which included the release of the DVDs for "Matrix Revolutions" and "The Last Samurai" as well as the television shows "Friends" and "The Drew Carey Show," both produced by the company's television studio and which both ended their network runs last year. Operating income from the unit fell nearly 60 percent to $137 million.
The company's publishing unit was helped by stronger book sales and increased overall advertising revenue despite ad declines at Time, Sports Illustrated and Fortune. The unit saw single-digit gains in both revenue and operating profit. Networks, which includes Turner Broadcasting, HBO and the WB Network, saw a narrow gain in revenue on strong ad sales, but increased programming costs caused profits to slip.