Film, cable divisions post revenue growth

Time Warner, still bedeviled by AOL, reported a 26% drop in net income Wednesday despite more upbeat news from its cable networks and film studio.

Total revenue for the second quarter ended June 30 inched up 5% to $11.6 billion, while net income fell to $792 million from $1.1 billion in the year-ago frame.

In years past, Time Warner stock got punished for the sprawling ambition of execs, who wanted to control distribution, tech and content. The writedowns and culture clash between old-line Time Inc. and AOL execs are the stuff of legend.

Now, the company has listened to critics by slimming down, officially detaching from Time Warner Cable as of last quarter and separating AOL into distinct (and sellable) business units. Yet Wall Street keeps pummeling the stock of the newly refashioned content-oriented conglom.

Shares have shed 20% of their value since last fall, ending Wednesday trading down a nickel at $14.83. The second-quarter results were reported before the market opened.

AOL’s operating net income dropped 36% to $230 million amid a 16% slide in revenue. Subscription revenue fell 29%, but the company said that was a result of the ongoing shift from a subscription model to an ad-supported model. Ad revenue increased 2% in the quarter. Surprisingly, AOL still has some 6.1 million dial-up access subscribers.

“We’ve now made the key financial and strategic decisions that will enable us to operate the access and audience businesses separately” in 2009, Time Warner CEO Jeffrey Bewkes said during a conference call with analysts to discuss the results. “We have the necessary flexibility to do something strategic with those businesses.”

Aside from the chance of partnering with another company (as was a possibility during the Microsoft-Yahoo soap opera) or selling part or all of AOL, Bewkes also noted the company’s $9.25 billion war chest stemming from the cable disposition. The company hasn’t yet decided to buy back any stock with those funds but will likely keep that cash in reserve for the right opportunity.

Time Warner’s name gets trotted out frequently in connection with NBC Universal’s future, should NBC U parent General Electric decide to exit showbiz, or as a potential buyer of stand-alone cable programming-driven entities like Discovery Communications or Crown Media. It submitted an early bid for the Weather Channel but lost out to NBC U’s richer offer in combination with several private equity funds.

The film studio’s operating income increased 16% on a collection of solid homevid titles, including “I Am Legend,” “The Bucket List,” “Fool’s Gold” and “10,000 BC.” The quarter also included the massive job losses at New Line and the elimination of Warner Independent and Picturehouse. Warner Bros. also plans to release fewer pics, in keeping with Hollywood trends.

“Some view the film business as unpredictable,” Bewkes said. “That’s not really been our experience at our company because viewed through the prism of a multiyear time frame, ‘The Dark Knight’ is no fluke.”

The Batman sequel will likely beat out “Shrek 2” to become the second-highest-grossing film of all time, giving Time Warner eight of the 15 top-grossing pics of all time.

The Turner cablers and HBO sent cable revenues up 9% to $2.8 billion. Subscriptions and ads both contributed to the growth.

The conglom’s entertainment nets posted CPM increases in the high single digits and dollar volume increases, which is at the high end for either broadcast or cable. TNT and TBS have undertaken a concerted push to increase the number of original series they offer in primetime, in a bid to compete head to head with broadcast nets for ad dollars and audience share.

HBO has endured a challenging period encompassing Chris Albrecht’s abrupt exit, the chasm left by the end of “The Sopranos” and the acknowledged mistake of letting “Sopranos” writer Matthew Weiner’s critical darling “Mad Men” get away to AMC.

Bewkes, whose rise through the corporate ranks began at HBO, noted on the earnings call that HBO has more shows in development now than at any other time in the pay cabler’s history. That’s an expensive measure to take to ensure another wave of successful shows, but one that the conglom is focused on, especially given the small-to-bigscreen success this summer of its long-running comedy “Sex and the City.”

HBO will debut new episodes of a new series at least once a quarter, Bewkes vowed.

Meanwhile, Time Inc., while not in the same harsh spotlight as AOL, is struggling. Ad sales are down 10% across all magazines, and the much-hyped transition of revenues to the Web is not showing up on the balance sheet as hoped. Operating net at Time Inc. fell 15%.

In a memo to all employees sent out after the earnings release, Bewkes reaffirmed the conglom’s strategic plan.

“I’m more confident than ever that we’re on the right path,” he wrote. “By continuing to execute, we’ll generate the kind of success that will keep us on top and benefit our shareholders. I know that it hasn’t always been easy, and that’s why I appreciate your hard work and dedication so much.”

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