Turner, HBO Lead Time Warner Results

Networks unit suffers 3% ad-revenue decline, can't offset declines in company's publishing, AOL and film units

Cable networks led the way again for Time Warner, reporting second quarter earnings Wednesday before the market open. The performance, however, wasn't strong enough to offset declines in publishing, AOL and the filmed entertainment segment as consumers and advertisers continued to cut back.

The company's networks unit, which comprises Turner Entertainment and HBO, recorded operating income of $875 million, up 17% for the period ended June 30. Adjusted operating income rose 14%, to $981 million, excluding one-off items such as write-downs, gains and losses on asset sales and securities litigation.

Network revenue rose 5%, to $3 billion, with an 8% growth in subscription revenue and a 3% decrease in advertising revenue. By comparison, Viacom's cable networks recorded a 6% dip in second quarter ad revenue on Tuesday.

Time Warner Chairman and CEO Jeff Bewkes said that the ad market wasn't showing major improvements. He declined to be specific about Turner's volume or CPM prices but commented that the company was operating at the higher end of the range. He added that the gap between broadcast pricing and pricing at Turner had still not closed but predicted a tipping point was close at hand.

"It looks as though overall dollars will be down a bit," Bewkes said generally of the upfront, adding that while he believes advertisers will "come back in scatter," decisions to hold dollars "could make the upfront less of an indicator for the ad market than it usually is."

In the network division, Bewkes outlined the best performing ad categories were quick-service restaurants, wireless and movies, while the weaker categories were automotive, finance, food and beverage.

According to Time Warner CFO John Martin, the network unit accounted for 70% of profits in the quarter. Martin said that domestically, entertainment networks saw growth while international channels experienced declines. He also noted advertising declines at the company's news networks because of difficult comparisons against last year's presidential elections.

Martin also mentioned the softness in the kids market: "It has been a challenging year. There are cutbacks in food and beverages. Cartoon [Network] is addressing this by aging up its audience. It's a change in strategy that is underway, and we hope it will open up ad categories that we don't participate in."

Responding to an analyst's question on whether bankruptcies at station groups could hurt Time Warner's syndication business, Bewkes said, "Were not particularly concerned. Not less than 10% of TV series sales come from off-network syndication, around 40% is cable and 60% from stations. If you had a severe problem in stations buying syndication, it could be one or two percent in revenue; that is not hard to move around to other buyers. We don't see a particular problem. You could always see some people going bankrupt, but it wouldn't be material."

Bewkes continued to reiterate the benefits of the TV Everywhere initiative, saying that the company was continuing discussions with cable companies and other distributors such as the satellite companies and telcos.

Time Warner's net income was $519 million for the period, down from $792 million in the same quarter last year. The New York-based media giant also reported a 2% dip in operating income, to $1.2 billion and a 9% slide in revenue, to $6.8 billion.

Net debt for the period fell to $10.5 billion, down $10.2 billion from $20.7 billion at the end of 2008 due to a cash dividend from the separation of Time Warner Cable in March.

Separately, the company recorded a $28 million gain from the sale of its stake in DVR firm TiVo Inc. The company also took an $18 million non-cash impairment charge on a Turner online video game business, GameTap which was sold.

In a statement, Bewkes said, "Were continuing the reshaping of Time Warner that we started last year. We're on track to spin off AOL to our stockholders around the end of the year."