This article was updated at 9:29 p.m.
Time Warner rode the small shoulders of a teen magician and a hobbit to double-digit revenue growth in a quarter marked by the strong performance of its film unit.
The theatrical release of “Harry Potter and the Prisoner of Azkaban” and homevideo release of Oscar winner “The Lord of the Rings: The Return of the King” helped Time Warner to a 10% increase in revenue and 17% increase in operating income in the second quarter.
Because of the convergence of “Azkaban,” “King” and “Troy” and the fact that “King” had its theatrical release in the third quarter of last year, comparisons will be difficult in the second half of the year. “Nevertheless, our growth will meaningfully exceed last year,” chairman Richard Parsons said.
“Azkaban” and “Troy” have returned $1.2 billion in box office receipts so far, with two-thirds coming from outside the U.S.
Time Warner recorded operating income of $2.6 billion in the quarter on revenue of $10.9 billion. Earnings dipped 27% to $777 million from a year ago, when profits were boosted by a $760 million settlement with Microsoft and a gain from the sale of its stake in Comedy Central.
Company expects full-year operating income to increase in the low-teen range from $8.7 billion in 2003.
The quarter marks the continuation of a turnaround for the world’s largest media conglom, which saw contributions from every business unit. AOL is still hemorrhaging subscribers but recorded its first quarter of year-over-year advertising growth since late 2001.
In addition to film, the cable networks were particularly strong as growing audiences drove advertising and affiliate fee increases.
In an example of intranetwork synergy, Parsons noted HBO creation “Sex and the City” (despite some recent ratings falloff) is driving audiences to sister net TBS.
Now that Time Warner’s businesses appear to be on track, Parsons said the company would focus on ways to expand, looking to acquire businesses in the “content arena.”
“We have an interest as a company in expanding our cable footprint,” Parsons said, calling cable a “superior” platform for delivering video, telephone and high-speed Internet that “extends the power and advantage of our content businesses.”
The two biggest targets in Time Warner’s sights have been bankrupt cabler Adelphia Communications and MGM, but Parsons signaled the asking price for both could be too high. “We’re not going to do just whatever comes along,” he said.
While overall results were good, analysts pointed out that the company suffers from comparisons with its biggest competitors in cable content, Viacom, and in distribution, Comcast.
Advertising at Time Warner’s cable networks was up 6%, a disappointing figure compared with an increase of more than 20% at Viacom’s MTV networks, noted Paul Kim, analyst at Tradition Asiel Securities.
Other analysts were concerned about continued subscriber losses at the cable unit, the company’s largest cash-flow generator. Unit lost 21,000 basic customers in the quarter as satellite operator DirecTV continued to target Time Warner markets.
“They were growing subscribers at 1%-2% until DirecTV targeted them last year,” said John Hill of Schwab SoundView Capital Markets.
Some questioned the wisdom of adding to cable when the business is under intense competition from both satellite and the Baby Bells. “The fear is that competition is going to get more intense over the next four quarters,” Kim said.
Time Warner media and communications group chairman Don Logan argued that telephone service, which should be available to all Time Warner cable customers at the end of the year, would be “a strong driver of growth over the next few years.”
Cable programming expenses jumped 15%, compared with 5% at Comcast, which renegotiated most of its agreements besides that with ESPN at the beginning of the year. Kim saw an upside in this comparison, as Time Warner also will renegotiate its programming deals in the coming year, making it a potential area of future savings.
The company said an investigation into accounting practices at AOL by the Securities and Exchange Commission is ongoing, with the company opening its own review of accounting recently at AOL Europe.