AOL Time Warner Sees Profit Return

AOL Time Warner Inc. said Wednesday that it returned to profitability in the first quarter but continued to lose subscribers and revenue at its troubled Internet unit.

The media giant reported net income of $396 million, or 9 cents a share. That contrasted with a loss of $54.2 billion in the year-ago quarter, when there was a huge write-down to reflect the falling value of the America Online Web unit and other holdings.

First-quarter earnings before interest, taxes, depreciation and amortization, a common measure of a media company’s performance, was up 14% to $2 billion, slightly beating Wall Street’s expectations.

Revenue, meanwhile, rose 6% to $10 billion, thanks to the company’s traditional entertainment properties, such as Warner Bros., WB network and HBO, as well as growth in its cable system. But advertising revenue fell 5% companywide even as rivals such as Viacom Inc. saw ad increases.

Speaking to investors at a meeting in New York, AOL executives called the recovery in the quarter better than expected after last year’s $99-billion net loss, the largest in U.S. corporate history.

“We’re on a good track to deliver on our full-year expectations,” Chief Executive Richard Parsons said.

Shares of the New York-based company rose 69 cents, or slightly more than 5%, to $14 in New York Stock Exchange trading.

Parsons emphasized the progress in reducing debt, which he hopes to trim by next year to $20 billion from the current $29 billion. The company raised $1.25 billion by selling its 50% stake in the Comedy Central cable network to Viacom this week and recently unloaded its stake in Hughes Electronics Corp. for $800 million.

The company is proceeding with plans to raise more cash through an initial public stock offering of its Time Warner Cable. But the IPO -- originally contemplated for the summer -- has been pushed back to the second half of the year, Parsons said.

Parsons gave no updates on the accounting investigation by the Justice Department and Securities and Exchange Commission, but said resolving the matter is one of his top priorities. He warned that the SEC probe could delay the company’s ability to complete the cable IPO, though he said AOL would still be able to meet its debt targets.

The Dulles, Va.-based America Online unit -- which has been the focus of attention by both Wall Street and government criminal investigators -- saw advertising revenue slump 42% in the quarter, pushing the division’s overall revenue down 4% to $2.2 billion. Recent layoffs and cost-cutting measures nevertheless enabled America Online to report an 18% rise in EBITDA.

Despite a recent push to boost subscribers of its high-speed Internet service, America Online suffered a second consecutive quarter of membership declines, losing 289,000 subscribers in the first quarter. As of March 31, America Online had 26.2 million subscribers in the U.S. and 6.3 million in Europe, where the unit’s growth is starting to decline for the first time.

“They are losing subscribers much faster than we expected,” said Jessica Reif Cohen of Merrill Lynch & Co.

Hedge fund manager Doug Kass of Seabreeze Partners predicts America Online could lose as many as 2 million subscribers worldwide this year. “The core business is starting to look like the long-distance business, and that’s not good,” said Kass, whose firm recently shorted AOL shares, betting that the price will drop.

Don Logan, who heads AOL Time Warner’s media and communications properties, said advertising at the Internet unit is beginning to recover, but he affirmed predictions that the online company overall will report flat revenue this year and EBITDA down as much as 10%.

Warner Music Group was another disappointment. Revenue fell 3% to $914 million, and the unit suffered a $14-million operating loss contrasted with $20-million operating income in the earlier period. The company blamed general weakness in the music industry.

Revenue and earnings from the company’s film and television production companies, including Warner Bros. and New Line Cinema, helped offset the declines elsewhere. First-quarter revenue for filmed entertainment rose 11% to $2.4 billion -- more than any other AOL Time Warner unit -- and EBITDA surged 39% thanks to strong home video and DVD sales.

Jeffrey Bewkes, who runs the company’s entertainment and network divisions, said costs associated with the Iraq war increased expenses at CNN, but were in line with expectations.

Thanks to increasing subscriber rates for HBO and the successful release of “My Big Fat Greek Wedding” on HBO Video, revenue at the network division rose 17% during the quarter to $2.1 billion.

At Time Warner Cable, the nation’s second-largest cable operator, revenue rose 9% to $1.8 billion, driven by increasing sales of digital and high-speed Internet service. Those increases were offset by a 33% decline in advertising revenue.