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AOL TW 1Q: Good News, Bad News

AOL Time Warner has signaled some progress toward getting its house in order, but the company still sees plenty of continuing problems.

On the plus side, the entertainment and Internet giant posted first-quarter cash flow much higher than expected and also cut a deal to sell its half interest in Comedy Central, garnering $1.2 billion in cash with which to chip at the company's $25 billion debt. Further, the company's TV networks turned in a strong performance.

But growth in the cable division was low, America Online's subscriber losses grew, and the company confirmed a delay in the planned initial public offering of the reorganized Time Warner Cable.

Oh, and questions about the company's accounting practices are widening, with the Securities and Exchange Commission scrutinizing another $200 million worth of advertising deals on America Online. Investigations by the SEC and the Department of Justice remain the darkest cloud over the company. President Richard Parsons emphasized that resolving those investigations "remains one of my highest priorities."

Said Sanford Bernstein & Co. media analyst Tom Wolzien, "If it weren't for the SEC investigations and the bevy of shareholder lawsuits, AOL Time Warner would be categorized as a troubled company but one in the early stages of recovery."

Corporate revenues increased just 6%, to $10 billion, for the three months ended March. Operating cash flow rose 8%, to $2 billion. The standout was the Warner Bros. studio, whose 39% growth in cash flow was fueled by strong DVD sales and the performance of the second installment of The Lord of the Rings.

Cable revenues increased just 9.4%, to $1.8 billion, shy of the double-digit growth the unit had been showing. And operating cash flow increased a mere 6%, to $691 million. That's because of the games AOL Time Warner plays with launch fees from networks seeking carriage, usually paid in the form of advertising on operators' systems.

While other MSOs simply deduct the $3- to $7-per-sub fees from their programming expenses, Time Warner Cable treats the fees as advertising revenue. Now that it has burned off most of the fees from networks launched over the past few years, ad sales have dropped 33% from last year, and overall revenue growth has slowed. AOL executives would like everyone to look at the division without the distortion of the launch fees, which would have cable revenues growing 14%.

But the TV networks were strong. HBO's backing of My Big Fat Greek Wedding continued to pay off as the movie hit DVD. Total division revenue increased 17%, to $2.1 billion, while cash flow rose 16%, to $500 million. Parsons said CNN's cost for covering the Iraqi war was expected and manageable.