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Restructurings at IAC, Time Warner

Posted on Tuesday, Aug 12th 2008

The recession seems to be hurting media stocks as well. Here are some recently reported Q2 earnings.

We did a deep dive on IAC(Nasdaq: IACI) last Fall and recommended major restructuring which is now under way. The company’s revenues for the quarter were in line with the market’s expectations and sequentially flat at $1.6 billion. Over the year, the revenues grew 7%. EPS of $0.35 was substantially higher than the Street’s expectations of $0.31 and increased 13% over the year.

IAC is finally getting to go through with its longtime plan of spinning off into five segments: Tree.com, HSN, Ticketmaster, Interval Leisure Group and IAC. IAC will hold on to about 32 Internet brands ranging from the more established brands such as Ask, Match and CitySearch to some smaller Internet properties like Evite, Gifts and Pronto.

The biggest drivers of revenue growth were Ticketmaster, Interval and HSN, which grew 30%, 20%, and 11% respectively. In the real estate segment, the market downturn continued to affect their Lending Tree revenues. Lending Tree is now operating in 14 markets with only 1,000 agents. The “New IAC” recorded 11% revenue growth, with media and advertising revenues growing 7% over the year.

Management maintained that weakening market conditions have not yet directly affected business. They have entered into a strategic partnership with Google, which is giving them monetization benefits on the search side.

They are happy with the progress being made on CitySearch, which currently has over 20 million users and recorded 19% growth over the year. Evite also had good penetration statistics, with 16 million users and 20% growth over the year.

IAC is also expanding on mobile phones. They currently have 35 million page views and 1.5 million text messages going to their systems. Seven of their businesses have active mobile products, and they have partnered with 13 wireless carriers. They want to expand through acquisitions and are looking at properties that can add value through expertise in distribution and monetization. IAC’s recent purchase of Lexico, a language reference portfolio, for over $100 million was one acquisition which helped add to their Ask.com user base.

The stock had hit a 52-week low of $16.85 last month. It is currently trading at $19.00.

1yr IACI

Time Warner Inc (TWX) started their corporate restructuring in the last quarter with the separation of Time Warner Cable and have finally paid heed to my suggestion to separate AOL as a business line. But they are not combining AOL and Time, Inc. as I had suggested. If they did, it would put in place a string of verticals which, combined with AOL’s portals and subscribers, could become a Yahoo-like franchise of great value.

Revenue for the quarter grew 5% to $11.6 billion and beat the market’s expectations of $11.5 billion. EPS increased 9% both sequentially and annually to $0.24 and was $0.01 higher than the Street’s expectations. The company expects earnings to be in the range of $1.07-$1.11 for the year.

AOL’s subscription revenue was down 29%. Cable revenues grew 7%, propelled by higher Internet phone and VOD fees. Their films division grew 14% as they saw box office hits in I Am Legend and The Bucket List. The Turner Broadcasting networks unit, which includes HBO, TNT, and CNN, recorded a 9% increase in revenue.

The recession is hurting advertising revenue the most. The impact was seen specifically in the automotive, telecommunications and financial services sectors. Display advertising was down 14% while overall ad revenue rose a meager 2% to $0.53 billion in the quarter. Ad revenues for Time Inc., fell 10% as print ads revenues decreased. See why I am suggesting moving this unit towards AOL and a primarily online destiny?

Management realizes the urgency of the need for strategic restructuring and have made it an objective for the year. They are looking at approximately $140 million in annual cost benefits through the reorganization of their New Line Cinema. They are looking at acquisitions as a key part of their strategic growth, and they need to ensure that they acquire properties that will help enhance their vertical presence.

They also increased their focus on the video games section through the acquisition of TT Games, the maker of Lego Indiana Jones and Lego Star Wars, and Batman. They tied up with an Abu Dhabi-based firm that will fund up to $250 million to co-finance the development of up to 75 games over the next seven years. They have also tied up with a UK-based games developer for the distribution of these games.

The stock had reached a new 52-week low of $13.50 last month. After the results announcement, it fell $0.05 to $14.83 and is currently trading at $15.88.

1yr TWX

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