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November 02, 2005

AOL Doesn't Come Through But A Solid Quarter for Time Warner

Just a quick follow-up to my earlier post about AOL and Time Warner (TWX). AOL did not come though on the ad line as I thought might occur. I still believe we will see strength in 4Q when AOL.com really launches but for now the push-pull between subscriber loss and advertising growth is too large an obstacle to overcome. Interestingly, paid search grew nicely in the quarter which does suggest the GOOG numbers were something of a tip-off. However, branded advertising was sub par, maybe growing less than 10%, and this is where the AOL.com launch is supposed to help.

Beyond AOL, I thought the TWX numbers were solid but not as good as an initial review suggested. As mentioned, numbers at AOL were not that good. Additionally, adjusting for one-time items, growth at Cable was 12%, not 15%. Margin actually contracted slightly at Cable, although top line growth of 12% was excellent. I am also still concerned about the Cable Networks portion of the Networks division. Networks was the source of the positive surprise but it all came from Content which was mostly syndication revenue at HBO for Sex and the City. Subscription revenue grew just 5% and advertising grew just 8%. Cable Networks have been the fastest growing portion of TWX and get the highest implied valuation. I think that business is maturing across the industry and that multiple contraction could become apparent in 2006. Look at the multiples at E.W. Scripps (SPP) and Discovery Communications (DISCA) to get a sense of why I am concerned.

I still think TWX can head to the low $20s off a strong fourth quarter driven by improved advertising growth at TWX. I think the Street will quickly forget 3Q AOL trends as the focus shifts to the seasonally strong 4Q.

Posted by Steve Birenberg at November 2, 2005 11:11 AM in TWX