Time Warner Reports Strong 2nd Quarter

On the same day it reported strong earnings, Time Warner Inc. said it is ending a fruitless, two-year attempt to disengage itself from a complicated partnership with US West Media Group Inc.

Time Warner had been trying to disengage itself from the regional phone company in order to reduce its nearly $18 million in debt and simplify its structure. The company had been expected to trade a portion of the 10 million cable subscribers held in the partnership to US West in exchange for full control of the other two assets in the joint venture, Home Box Office and the Warner Bros. studio.

But with record earnings for the second quarter, a reinvigorated stock price and new faith on Wall Street in cable, Time Warner Chairman Gerald Levin said Wednesday that the partnership will remain intact and that the company will look for other ways to reduce debt.

Time Warner on Wednesday reported net operating income of $30 million for the quarter, contrasted with a $31-million loss in the same period a year earlier--far surpassing analyst expectations.

The recently acquired Turner Broadcasting System cable networks, including CNN, TNT and TBS, propelled earnings despite a downturn in Time Warner’s traditional workhorse, its music division. Cash flow at Warner Music Group plummeted 24% between April and July, to $125 million from $165 million in the year- earlier quarter.

The earnings momentum pushed up Time Warner’s stock $4.25--nearly a 10% rise--on the New York Stock Exchange, to $49.63, near its record close of $50 a share last month.

Wall Street analysts said the decision to keep the partnership intact stems not only from the failed negotiations, but also from changes in the outlook for cable over the last six months.

“The planets have realigned,” said Christopher Dixon, an analyst at PaineWebber Inc.

US West has long maintained that it likes the partnership the way it is and was less than eager to buy more firms after its purchase last year of Continental Cablevision Corp., which made the regional phone company the nation’s third-largest cable operator.

Worries about competition for cable from satellite television have also subsided in recent months and were further eased by Microsoft Corp.’s $1-billion investment last month in Comcast Corp.

Time Warner also is starting to realize the advantages of owning cable systems as well as a family of channels. One analyst said TNT’s cash flow rose significantly after Time Warner moved the network from the outer limits of the television dial to Channel 3 on its New York system.

Analysts also say that Time Warner is counting on digital set-top boxes for cable to increase its cash flows, and as evidence pointed to an $8-a-month rise in customer bills in Memphis, Tenn., where the service has rolled out.

Improved cash flows could make it easier for the company to pay down debt. The company is also expected to announce a partnership with Tele-Communications Inc., the nation’s leading cable operator, to shift their contiguous systems, along with debt, into a new entity.

Though analysts were bullish about cable networks, there was disappointment in the music division’s performance.

Once considered the most envied operation in the record industry, Warner Music is still reeling after a series of embarrassing management shake-ups that resulted in the ouster of nearly a dozen senior executives.

Things have calmed down in the record division since it was taken over last year by Warner film executives Bob Daly and Terry Semel, but the company’s image has suffered greatly in the creative community.

The division, which consists of Warner Bros. Records, Elektra Entertainment and the Atlantic Group, was bumped off its perch as the No. 1 market share leader in the U.S. by the independents earlier this year. Although the company still ranks ahead of its five major competitors, Warner’s market share has shrunk from 22% two years ago to a bit more than 17% this year.

Warner Music attributed the decline to poor music sales internationally and a weak retail climate in the U.S. recording market. But music industry sources say the decline can be attributed primarily to the inability of its flagship label, Warner Bros. Records, to break new acts.