For many AOL Time Warner investors, the most disconcerting news in the company's gloomy financial report on Wednesday was the disclosure that the problems had spread beyond America Online to Time Warner's cable systems.
The company told Wall Street to lower its expectations for growth, warning that the cable systems' advertising revenue was about to take two hits. Other AOL Time Warner units, it said, plan to cut back their advertising on the company's cable systems. And one-time advertising deals with new cable services are drying up.
PHOTO: NY TIMES
Those surprises, along with a US$10 billion write-down in the value of the cable systems, only deepened skepticism about the company. To some investors, they were echoes of the company's abrupt disclosures last year that AOL's advertising revenues were evaporating faster than the company had led them to expect.
Only this time, the grown-ups from the Time Warner side of the company could not blame the kids at AOL. And the timing could not be worse: AOL Time Warner plans to sell part of its cable operations to the public later this year in the hope of raising billions to trim its huge debts.
"The credibility questions had been focused largely on AOL, but now skepticism about credibility is spreading to the rest of the company," said Dennis Leibowitz, who runs ACT II Partners, a hedge fund that specializes in media companies but does not own AOL Time Warner shares.
Tom Wolzien, a media analyst at Sanford C. Bernstein, delivered a similar message to his clients.
"Once again," he wrote, "less than clear accounting/public relations practices for booking revenues easily cause a resurgence of 'what else is buried in there that I don't know about' questions from investors. The fact is that the company never indicated that there was a finite length to the advertising arrangements. "
AOL Time Warner shares fell more than 14 percent Thursday, closing at US$12. Besides the cable woes, investors were reacting to Ted Turner's resignation as the company's vice chairman and writedowns that produced a net loss for last year of nearly US$100 billion.
Analysts said the cable unit was still healthy and likely to resume solid growth in the next several years.
But the sudden emergence of questions about the business have pushed it toward the top of the long list of problems confronting Richard D. Parsons, the company's chief executive.
Edward Adler, an AOL Time Warner spokesman, said Thursday that earlier company filings had suggested that ad revenues from cable services would decline.
He said that the specifics had only now become clear.
Even when profits at the AOL online service began plummeting and questions were raised about its accounting, investors never worried about the health of AOL Time Warner's cable systems.
They matched industry leaders like Comcast and Cox Communications in stable earnings growth.
But those companies were accounting for the fees that they received from new cable channels differently than AOL Time Warner, analysts noted Thursday.
For example, when a cable service made a deal to be carried on Time Warner systems for five or 10 years, a significant part of the millions it paid went to buy advertising time. And Time Warner booked most of that revenue in the first year.
Comcast, by contrast, has not given cable services ad time in exchange for the fees they paid to have their channels carried. Instead, it has treated the fees as an offset to expenses and has booked the fees over the life of the contracts.
So AOL Time Warner's accounting approach, while allowed, sets it up for a big revenue drop, even as some cable rivals continue to enjoy benefits on the cost side, analysts said.
Jessica Reif Cohen, an analyst at Merrill Lynch, estimates that such fees accounted for about US$230 million, or 3.5 percent, of the roughly US$7 billion in revenues for the AOL Time Warner cable systems unit last year. But the fees had a disproportionate impact on profits, analysts said, because with no offsetting costs, they went directly to the bottom line. With the big burst in new cable networks now long past, Rief estimates that such fees will account for only US$50 million in revenues this year.
After Wednesday's disclosures, some analysts reduced their estimates for cable revenue and cash flow growth at the company to as little as 7 percent from 12 percent. The company told analysts to expect "high single-digit to low double-digit growth."
Slowing growth in the cable systems business could be a blow to the company's planned spin off of a stake in the operation later this year. The spinoff is intended to raise money to make a US$2.1 billion payment to Comcast to complete the unwinding of a joint venture, and to reduce the company's US$26 billion debt, as well.
One analyst estimated that a spinoff of 10 percent of the cable systems unit, which might have raised about US$4.2 billion last year, would fetch about US$3 billion today.
FALLING BEHIND: Samsung shares have declined more than 20 percent this year, as the world’s largest chipmaker struggles in key markets and plays catch-up to rival SK Hynix Samsung Electronics Co is laying off workers in Southeast Asia, Australia and New Zealand as part of a plan to reduce its global headcount by thousands of jobs, sources familiar with the situation said. The layoffs could affect about 10 percent of its workforces in those markets, although the numbers for each subsidiary might vary, said one of the sources, who asked not to be named because the matter is private. Job cuts are planned for other overseas subsidiaries and could reach 10 percent in certain markets, the source said. The South Korean company has about 147,000 in staff overseas, more than half
Taipei is today suspending its US$2.5 trillion stock market as Super Typhoon Krathon approaches Taiwan with strong winds and heavy rain. The nation is not conducting securities, currency or fixed-income trading, statements from its stock and currency exchanges said. Yesterday, schools and offices were closed in several cities and counties in southern and eastern Taiwan, including in the key industrial port city of Kaohsiung. Taiwan, which started canceling flights, ship sailings and some train services earlier this week, has wind and rain advisories in place for much of the island. It regularly experiences typhoons, and in July shut offices and schools as
An Indian factory producing iPhone components resumed work yesterday after a fire that halted production — the third blaze to disrupt Apple Inc’s local supply chain since the start of last year. Local industrial behemoth Tata Group’s plant in Tamil Nadu, which was shut down by the unexplained fire on Saturday, is a key linchpin of Apple’s nascent supply chain in the country. A spokesperson for subsidiary Tata Electronics Pvt yesterday said that the company would restart work in “many areas of the facility today.” “We’ve been working diligently since Saturday to support our team and to identify the cause of the fire,”
TECH PARTNERSHIP: The deal with Arizona-based Amkor would provide TSMC with advanced packing and test capacities, a requirement to serve US customers Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) is collaborating with Amkor Technology Inc to provide local advanced packaging and test capacities in Arizona to address customer requirements for geographical flexibility in chip manufacturing. As part of the agreement, TSMC, the world’s biggest contract chipmaker, would contract turnkey advanced packaging and test services from Amkor at their planned facility in Peoria, Arizona, a joint statement released yesterday said. TSMC would leverage these services to support its customers, particularly those using TSMC’s advanced wafer fabrication facilities in Phoenix, Arizona, it said. The companies would jointly define the specific packaging technologies, such as TSMC’s Integrated
RSS