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In 'Reset Year,' Time Warner TV Fortunes Sag

Time Warner's network and cable-system divisions went surprisingly slack during the fourth quarter, with the slide of The WB network proving a big drag.

Overall, though, Time Warner Chairman Richard Parsons is fairly happy with how 2003—which he regards as a "reset year"—turned out. That included stabilizing America Online and cutting deals to sell Warner Bros. DVD-manufacturing unit, Warner Music and Time-Life books.

Speaking to securities analysts as the company released results last week, Parsons noted, "Last year, you couldn't stop asking me, 'What are you going to do about that debt?' Today, the persistent question is 'How are you going to spend the money?'" that resulted from those sales.

For the three months ended December, Time Warner's broadcast- and cable-networks division increased revenues just 4% to $2.2 billion, and operating cash flow dropped 9% to $608 million. The big problem was The WB, whose viewership plunged 18%-20% this season. That sliced ad revenues by 10%, offsetting an 8% increase in ad revenues at the Turner networks. License fees from operators increased for the Turner nets and pay service Home Box Office.

Fulcrum Capital media analyst Richard Greenfield said the network group's performance is even worse than it appears. The results include a $45 million benefit from changes in how HBO accounts for syndication of shows like Sex and the City. Without the benefit, network earnings fell almost 16%, Greenfield said.

At Time Warner Cable, revenue and earnings growth failed to get into the double-digit percentage range that the division has accustomed investors to expect. Revenues grew 9% to $2 billion, while cash flow increased just 7% to $812 million. That's partly because of accounting games Time Warner played in the past quarter, counting launch support from cable networks as advertising revenue. That money has dried up, so it's depressing Time Warner Cable results.

Normalizing for those games, Time Warner Cable's cash flow would have increased a strong 14%.

Time Warner expects strong growth to return to both divisions this year. Companywide revenue rose 6% to $10 billion, while cash flow fell 7% to $2.4 billion.