Time Warner Q2: It's a Sick Puppy (and So Is AOL)

Time Warner reported Q2 results, announced a $5 billion stock-buyback, and reaffirmed guidance for the balance of the year.  AOL’s subscription revenue tanked, and ad revenue only rose 16%, a sharp deceleration.  All divisions but Cable continue to struggle:

AOL: Revenue down 38%, thanks to 55% drop in subscription revenue (loss of 1.1mm subs to 10.9mm and remaining subs switching to cheaper plans).  Ad revenue up only 16%, versus 40%-ish in prior quarters  Adjusted EBITDA also down modestly year over year, to $485 million.  Impressive cost savings on marketing and network costs (from change in subscriber plan) did not quite offset loss of revenue.  Remember what we said a few days ago about AOL turnaround going OK?  Sorry about that.

Cable: Revenue up 59%, but vast majority from acquired systems.  Legacy systems (organic growth) up 10% year over year.  EBITDA up 31%, again mostly from acquisitions. 

Filmed Entertainment:
Revenue down 5%, adjusted EBITDA down 24%.

Networks (Turner and HBO):
Revenue down 1%.  EBITDA up 10%, but this was aided by absence of money-losing WB network.

Publishing:   Revenue flat.  EBITDA up 12%, again partially aided by one-time items in year-over-year comparisons.

It’s not immediately clear how much of this depressing performance is Time Warner’s fault and how much just goes hand-in-hand with operating traditional media businesses these days (a lot), but with the exception of cable, Time Warner is not a healthy company. 

Also, unless your time-horizon is short, ignore the apparently encouraging news about “reaffirming outlook for 2007.”  For this company and its shareholders–just as for many traditional media companies and their shareholders–this year and next year are irrelevant. We are in the midst of a profound generational technology shift that threatens to destroy the economics of almost every traditional media business.  As at the New York Times, el al, therefore, the more important question is, “How are you going to position yourself for the next 25 years?”

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