Time Warner Spinoff Smackdown: AOL vs. TIME

Should you buy the Time Warner spinoff?

What is currently known as Time Warner Inc. (NYSE: TWX) came about in 1990, with the merger of Warner Communications and Time Inc. Warner has always done very well on the TV and film side of the business, but I never liked the merger with Time Inc. I also doubt Warner ever expected publishing to become effectively obsolete 20 years later.
I always felt the company’s subsequent merger with AOL (NYSE: AOL) never made much sense, either. Warner overpaid and the two company cultures never really meshed.
Now Time Warner has spun off both AOL and Time Inc. Are either worth buying for your portfolio?
AOL has become a content aggregator, with varying degrees of quality. Even with its addition of the Huffington Post, there isn’t much that is terribly unique about AOL. Nevertheless, the brand has value and there is a pretty decent business bubbling around in there.
AOL’s last quarter showed a 14% year-over-year increase in unique visitors; a big increase in programmatic revenue, lifting that segment to 37% of non-advertising revenue; an 18% increase in global ad revenue; a 44% increase in third-party platform revenue, and still generated $153 million from subscription services.
AOL’s operating income tripled to $48 million. Free cash flow, which is really what the online business is all about outside of visitors, grew 57% to $101 million and $178 million year-to-date. Total advertising revenue for the first nine months was $1.35 billion. The company has $457 million of cash.
Overall, AOL is growing much faster than I thought it was.
I am not fond of the publishing business today. There’s no money in it. Even legendary names like People and Sports Illustrated will always find print editions to be a challenging value prospect.
Time Inc. publishes 21 other magazines including InStyle, Time, Real Simple, Southern Living, Entertainment Weekly, and Fortune. It publishes an additional 70 magazines internationally.
On top of that, Time Inc. provides content marketing services, targeted print and digital advertising programs, branded book publishing, and marketing and support services (such as magazine subscription sales services, retail distribution and marketing services, and customer service and fulfillment services to third-party clients). It has 45 magazine-related websites and licenses 50 editions of its magazines to publishers in 20 countries.
As you can see, Time Inc. is all publishing. And publishing stinks.
How bad is the publishing business? For Q3, Time’s revenues were flat at $821 million. An increase in expenses caused net income to fall to $84 million from $114 million. For the first nine months, operating cash flow fell from $247 million to $170 million. Free cash flow fell from $228 million to $140 million.
Time has $325 million in cash and $1.32 billion in debt.
Why in the world would you want to own a publishing business? That’s like owning horse-and-buggies. No wonder Time Warner spun off the company – it was a drag on its otherwise successful media properties.
There is no way you should own Time Inc. You should even consider shorting it.
As for AOL, I’m not crazy about the business. There’s nothing special about it. Maybe if it merged with Yahoo! (NASDAQ: YHOO) it would be worth considering. Otherwise, if you are going to go digital, go with Google (NASDAQ: GOOG).
The real winner of the AOL and Time Inc. spinoffs is Time Warner. It has now successfully freed itself from a past-its-prime Internet content aggregator that is like the junior varsity version of Yahoo!, and a decaying publishing business that was a complete drag on earnings.
Movies and TV are what Time Warner does best. Now investors can reap the benefits of those thriving businesses without all the dead weight.

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