Time Warner (TWX) reported largely in-line Q1 earnings Wednesday, with increased revenue from cable networks and filmed entertainment offsetting a 23% drop at AOL. CEO Jeff Bewkes said the company has decided to spin off its cable unit, but gave no indication of timing other than “we expect to finalise a deal soon.”
On AOL, Bewkes said the 18% decline in display ad sales was the result of not having fully integrated the Quigo and Tacoda sales forces within Platform A, and that the unit would continue to struggle in Q2 before turning around. Work is ongoing on the separation of AOL’s access and advertising-supported businesses, which should be complete by the end of Q2.
Notes from the 10:30 a.m. Q1 earnings call with CEO Jeff Bewkes:
On cable: “As you saw this morning in our release, we have now decided a complete structural separation is in the best interests of Time Warner Cable shareholders and Time Warner shareholders. We feel these companies would be better off separated than they are together.”
On AOL: Bewkes says by the end of Q2 the company will have made all the restructuring necessary to separate the dail-up access business from the advertising and media business.
On the networks: The good news in the quarter was strong ad growth at Turner with ad revs up 13%. CPMs are up double-digits over last year’s upfront. While some companies have invested in niche networks, we have invested in our big, broad brands (TNS, TNT, CNN). “We believe Turner is better positioned than ever to challenge the broadcast networks.”
On publishing: Seeing a negative impact from the economy in magazines.
Bewkes on the good news from AOL: Page views in content verticals in Q1 up 22%, fueling overall page-view growth. Revenue at partner sites grew y/y. Platform A has the greatest reach of any ad network and delivers 3 billion ad impressions per day. We expect strong, continued growth.
And now the bad news: We were not satisfied with the performance of display advertising on our owned and operated inventory. We didn’t integrate Platform-A fast enough and that created a sales channel conflict. We have moved quickly to resolve this. We are creating one sales team able and motivated to sell across all of Platform A.
We don’t expect to see the full benefits in this in the current quarter, but we are optimistic that the challenges are behind us. Display advertising dropped 18% in the quarter, a $42 million y/y decline. Expect the same in the second quarter which will also suffer comparisons to last year as AOL restructures its sales force.
One big Q1 issue for AOL: Apollo Group, one of the biggest online advertisers for University of Phoenix, cut its Q1 spending to $17 million from $56 million a year ago.
Q&A session begins…
On AOL’s sales channel issues: what was the problem and did it impact price? Also, why is Bebo a good deal?
Bewkes: We were in the process of integrating Tacoda and Quigo and had several sales forces and had not yet put them together. We missed some opportunities on (ad) pricing.
On Bebo, our previous acquisitions have been about improving our ability to sell ad inventory. With Bebo we gain the opportunity to grow usage. Because we have ICQ we can combine it with Bebo’s social networking functions.
Question about Turner strategy to pursue original programming… will it increase costs?
Bewkes: Yes, but if we can develop hits at Turner, like we did at HBO, then we can exploit those in DVD, which is where the big money is.
Backing out cable, you are expecting mid-single digit cash flow growth in 2008 cash flow for the content businesses and AOL. Can you accelerate that?
Bewkes: The network business is growing, as is film business. We are redesigning the cost structure that will lead to growth. In publishing, some of our big titles like People are growing at double digits. We believe as we move magazines to digital, growth rate will resume as we move away from print.
If you separate the declining access business from AOL’s numbers–then you have a pretty healthy growing OIBITDA business and a very healthy EPS business.
What will Time Warner look like in three years? How core is AOL? Do you need to be in the publishing business? And why is the cable spin taking so long?
Bewkes: on cable, it’s not taking long and there are tricky governance issues involved. When we have terms finalised we will be in a position to give you the specifics on it. On TWX overall, we think the content brands we have are very strong and are in a scale and have management that knows how to succeed. We think we can put ongoing, reliable strong growth performance into Time Warner.
Will you look to make acquisitions?
Bewkes: We would like superior brands in superior positions. That’s our position in film, networks and publishing. We are trying to build it online. You won’t see us doing any transformative acquisitions. Only deals that would add to what we already do.
What level of due diligence was involved in the Bebo acquisition?
Bewkes: The due diligence was performed by AOL and by Time Warner. Did I approve the acquisition? Yes!
What is pricing gap on advertising between the Turner networks and broadcast networks?
Bewkes: The gap between what you get on Turner–it varies from show to show. In general, we are 60%-70% of broadcast so there is up-side for that reason. Viewers moving off broadcast are moving to the big cable networks.
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