A weak AOL mars results at Time Warner

Declines in revenue and operating income at Time Warner Inc.’s struggling AOL division crimped the media giant’s results in the second quarter, despite strong gains in cable television and a solid performance at its movie studio.

Time Warner reported net income of $792 million, or 22 cents a share, for the second quarter ended June 30, down 26% from $1.07 billion, or 28 cents a share, in the same period last year. The bottom line was hurt by special charges of 2 cents a share compared with a one-time gain of 3 cents a share a year earlier.

Still, revenue for the conglomerate, which counts Warner Bros., HBO and Time magazine among its properties, increased 5.2% to $11.6 billion from $10.98 billion last year.

Media analyst Michael C. Nathanson of Bernstein Research said in a report that Time Warner “bucked the trend” of below-par second-quarter earnings from media companies in a difficult advertising environment.

Time Warner’s cable networks -- including HBO, TBS and TNT -- led with revenue increasing 9% to $2.8 billion, while operating income jumped 18% to $749 million. Election coverage on CNN and high ratings for TNT shows such as “The Closer” and “Saving Grace” pushed up subscription and advertising revenue by 10% and 11%, respectively.

The filmed entertainment segment, which includes the Warner Bros. studio, reported revenue of $2.6 billion, up 14%. Operating income rose 16% to $94 million from $81 million, propelled by the hit summer releases “Sex and the City” and “Get Smart” as well as home-video launches of films such as “I Am Legend.”

Although restructuring costs were incurred during the quarter and are anticipated in the third quarter as well, from New Line Cinema’s consolidation into Warner Bros., Time Warner expects to save $140 million annually by combining the studios, Time Warner Chief Executive Jeffrey Bewkes told analysts. The units’ integration will begin next year.

Bewkes noted the film division’s positive outlook for the year, given the box-office dominance of “The Dark Knight” and the upcoming releases of the first computer-animated “Star Wars” film and the next “Harry Potter” installment.

“Dark Knight,” which has produced record box-office revenue, was released July 18, and results will begin to appear in the third quarter ending Sept. 30.

“Some view the film business as unpredictable,” Bewkes said in the conference call, noting Warner’s success in developing film franchises such as the Batman series and mining its comic book and television assets. “That’s not really been our experience at our company.”

Ad revenue was down 9% for Time Warner publishing, contributing to a 6% slide in revenue to $1.2 billion. Operating income fell 15% to $218 million from $256 million. Increases in subscriptions and online viewership weren’t enough to offset the decline.

“Time Warner’s transition to leveraging their more prominent brands, whether it’s Time or Sports Illustrated, to online is making progress,” said Jeffrey Logsdon, a senior analyst with BMO Capital Markets. “But it’s a tough business, and it’s probably not going to be any less tough next quarter or next year.”

AOL suffered a 16% decline in revenue to $1.1 billion and a 36% fall in operating income to $230 million. It continued to lose subscribers for its dial-up Internet service, which Time Warner attributed to its decision two years ago to offer AOL e-mail accounts for free. Time Warner confirmed it would begin running AOL’s access service and ad-supported website as separate businesses next year. “The access business is almost in an oil-well-like circumstance with depletion,” Logsdon said, noting that AOL has lost 14 million subscribers in the last three years.

Time Warner agreed to shed its majority ownership of Time Warner Cable, which had a 7% increase in revenue to $4.3 billion, with growth in the video, voice and Internet sectors.

Operating income for the second-largest cable provider rose 4% to $738 million. Time Warner also maintained its guidance for OIBDA growth -- operating income before depreciation and amortization -- between 7% and 9% this year.

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swati.pandey@latimes.com