AOL Ad Growth Brightens Poor Time Warner Quarter

By Sam Diaz
Washington Post Staff Writer
Thursday, May 3, 2007

Time Warner said yesterday that the financial performance at AOL was one of the firm's highlights during the first quarter, even though revenue at the Internet company dipped 25 percent.

Operating income for AOL, of Dulles, rose 27 percent during the three months ended March 31, but the firm continued to lose subscribers as it makes the transition to a business model based on advertising revenue from one based on selling subscriptions. AOL's advertising revenue rose 35 percent during the quarter.

With the exception of its cable business and AOL, Time Warner's 18 percent decline in profit was attributed to a slowdown in advertising revenue and sales. Profit fell in other media divisions, such as the company's film and publishing businesses.

Time Warner earned $1.2 billion in the first quarter, down from $1.46 billion in the first quarter of 2006. Revenue was $11.18 billion, up from $10.24 billion.

Time Warner chief executive Richard D. Parsons told analysts yesterday that he has confidence in AOL's ability to shift to being an ad-based company with free Internet service.

"AOL is well positioned to grow overall profits for the year," Parsons said.

AOL's operating income before depreciation and amortization nearly tripled, to $1.2 billion in the first quarter, which included the sale of a German unit. Excluding one-time adjustments, operating income rose 27 percent, to $542 million, boosted by growth in online advertising.

The Internet company lost 1.2 million subscribers during the quarter. Revenue fell to $1.5 billion, from $2 billion.

Time Warner executives said AOL's Web e-mail, now free, has become a lucrative way to serve up online ads. More than 40 percent of the ad revenue for the quarter stemmed from e-mail.

"That's remarkable if you consider that they're offering lot of this e-mail for free," said Tuna Amobi, senior media and entertainment analyst with Standard & Poor's in New York. "It corroborates the strategy that they can monetize those free e-mail accounts."

Some analysts said they were optimistic that in the near future AOL could continue to expand advertising dollars through partnerships for search and display ads, as well as those on AOL Video. AOL is positioned to outpace the industry's overall advertising growth projections, Amobi said.

However, Time Warner reported that page views on AOL's site were mostly flat for the quarter.

"The key is to keep those page views up," Amobi said. "As long as you keep people coming back," it doesn't matter if they're paid users or not, he said.

The company also addressed its relationship with Google and how it might be affected by Google's proposed $3.1 billion acquisition of DoubleClick, a leading Internet advertising company and AOL partner.

AOL's advertising partnership with Google, executives said, is one of the reasons the advertising portion of the business is growing. They said they expect no immediate impact if the merger is approved.

"We certainly expect that Google will continue to honor DoubleClick's obligations under their current relationship with AOL," Parsons said.

Time Warner shares closed yesterday at $20.94, up 35 cents.

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