TW, Viacom Look Ahead as Lackluster Quarter Ends

Aug 8, 2005  •  Post A Comment

For Time Warner and Viacom, last week’s second-quarter earnings calls were more about the future than the past.

With both companies generating earnings that are unlikely to change the opinions of investors who have been cool toward media stocks for some time now, executives at the companies took the opportunity to talk about what is coming down the pike.

They had good reason not to focus on the second-quarter results. Time Warner reported that it swung to a loss of $321 million for the quarter, from a year-earlier profit of $777 million, due in large part to a proposed settlement with shareholders who sued the company following the Time Warner-America Online merger. Revenue, meanwhile, slipped 1 percent to $10.7 billion, pushed down by declines at the company’s filmed entertainment and AOL divisions, where the culprits were weaker box-office sales and subscriber losses, respectively.

Viacom reported a second-quarter profit of $758.3 million, unchanged from a year ago, while revenue climbed 10 percent to $5.9 billion.

Viacom officials used the release of the quarterly results last Thursday to provide investors with more details of the planned breakup of the media giant, which was announced in June. The plan involves splitting the cable and film assets from the broadcasting and publishing assets by early next year. The cable and film company will be called Viacom and is expected to be a growth company whose stock will be used for acquisitions and stock repurchases. The broadcasting and publishing company will be called CBS Corp. and will generate cash flows that will be used to pay shareholder dividends.

“We now enter a new era in which bulk will not assure success,” Viacom Chairman and CEO Sumner Redstone said during the company’s earnings conference call. “Agility and innovation will separate the winners from the losers. Large is no longer in charge.”

Tom Freston, Viacom co-chief operating officer and CEO-designate of the new Viacom, said his focus will be on developing content for new broadband channels and international expansion.

Meanwhile, Leslie Moonves, Viacom co-chief operating officer and CEO-designate of the forthcoming CBS Corp., repeated his commitment to being compensated by cable and satellite operators for carriage of CBS and UPN. Mr. Moonves also said he would consider making content available for video-on-demand services as a way to generate revenue.

Time Warner’s conference call last Wednesday centered on the surprise news that it reached an agreement in principle with a number of shareholders who sued the media titan after it merged with America Online. Time Warner said it created a $3 billion reserve that will be used to pay out settlements related to claims that shareholders lost money following the merger.

Specifically, Time Warner said it set up a $2.4 billion fund to handle payments to shareholders who alleged fraud at AOL. Another $600 million was set aside to cover additional lawsuits not covered by the AOL class-action fraud claim.

The creation of these funds comes after Time Warner paid $300 million to the Securities and Exchange Commission, which conducted a probe into AOL’s accounting. In addition, the company paid a $60 million criminal fine and set aside another $150 million to settle other fraud claims made against AOL, as part of a settlement with the Department of Justice, which conducted its own probe.

The moves close the chapter on an issue that has dogged Time Warner for years and has lurked in the background of any major move the company has contemplated.

“By acting now to put these matters behind us, we avoid the cost and distraction of protracted litigation,” Time Warner Chairman and CEO Richard Parsons said during the conference call.

Based on the stock price, investors didn’t change their opinions about either company. Time Warner shares closed Thursday at $17.55 per share, only a slight change. Viacom shares were $33.58 just before the announcement on Thursday and ended the day at $33.87 per share.

By the Numbers: 2005 vs. 2004


Revenue (in millions)

2005: $11,379

2004: $10,573

Profit (in millions)

2005: $1,339

2004: $1,464

Stock price

Aug. 4, 2005: $33.87

Aug. 4, 2004: $34.02

Time Warner

Revenue (in millions)

2005: $21,277

2004: $21,045

Profit (in millions)

2005: $642

2004: $1,738

Stock price

Aug. 4, 2005: $17.55

Aug. 4, 2004: $16.88

Sources: Viacom, Time Warner