Time Warner beats forecasts

Strength in cable TV helped Time Warner Inc. increase second-quarter earnings 5 percent, beating analyst forecasts Wednesday, though the results were clouded by a new set of issues in the AOL Internet unit.

The New York-based media conglomerate, which owns CNN, HBO and the Time Inc. publications, said that from April to June it earned $1.07 billion, 28 cents per share, ahead of last year's profit of $1.01 billion and 24 cents per share. Revenue rose 6 percent to just under $11 billion.

Excluding discontinued operations and gains from an accounting change, Time Warner said it would have earned 25 cents a share. On that basis, analysts polled by Thomson Financial were expecting 21 cents per share. The revenue forecast had been $11.1 billion, slightly higher than what was achieved.

Although Time Warner also announced a new $5 billion stock buyback plan, shares fell 62 cents, or 3.2 percent, to $18.64 Wednesday.

One cause for investor concern was AOL, where revenue dropped 38 percent to $1.3 billion. That decline was not surprising, since AOL has been shifting from its subscription model centered around selling Internet access to an advertising-focused approach in which many AOL services are now free. In fact, AOL's operating income rose 9 percent to $360 million.

But AOL's ad revenue rose just 16 percent, well below the growth of more than 40 percent seen in each of the past four quarters. Time Warner no longer expects AOL to grow its advertising sales at or above the rate seen by the broader U.S. Internet industry this year.

Chairman and CEO Dick Parsons said on a conference call that the ad slowdown could be blamed partly on recent changes AOL has made to its Web content, including e-mail and search.

"Users usually need a little time to become accustomed to the redesigned pages, and advertisers naturally want to see how the new program performs before reinvesting significantly," he said. "Improvements like these to AOL's programs and products, which we're confident will yield long-term benefits, will come with some disruptions."

Time Warner Cable, which trades as a separate stock since a partial spin-off this year, saw revenue jump 59 percent to $4.0 billion, helped largely by subscribers acquired in deals with Adelphia Communications Corp. and Comcast Corp. Cable TV and high-speed Internet access growth were both strong. Operating income in cable rose 31 percent to $711 million. Cable's net income dropped 8 percent to $272 million, but it beat analyst forecasts.

In the Warner Bros. and New Line Cinema entertainment studios, revenue decreased 5 percent to $2.3 billion, despite strong showings at the box office by "Ocean's 13" and "300." Time Warner said the prior year's quarter had been exceptionally strong. Operating profit in the segment dropped 43 percent to $81 million.