Time Warner Maps Out AOL Split

Time Warner said it would split AOL’s dial-up Internet and advertising businesses into separate divisions by early 2009 and reported a slightly higher-than-expected quarterly profit, citing strong cable advertising sales and films like “Sex and the City.”

By shedding the cable division by the end of the year and splitting the AOL business, Time Warner (NYSE: TWX) plans to focus on creating content rather than bolstering its distribution business.

In the clearest sign yet of how the company sees its future, Time Warner Chief Jeffrey Bewkes said in a statement, “As we continue to reshape Time Warner, we’ll increasingly focus on our goal to create and manage high-quality branded content.”

The anticipated split of AOL into two divisions is seen facilitating a sale or merger of either unit. EarthLink signaled in a conference call with investors last week it could be interested in buying dial-up businesses.

Meanwhile, Time Warner continues to discuss deals to merge or sell off its online advertising and Internet business with Yahoo and Microsoft, sources have said.

The owner of CNN, Time Inc. and Warner Bros. movie studios said on Wednesday that second-quarter net income fell 26 percent to $792 million, or 22 cents per share, from $1.07 billion, or 28 cents per share, a year earlier, when it logged big gains including from the sale of its interest in Bookspan.

Excluding items that included $51 million in legal and professional fees and impairment charges from cable systems and Turner networks, profit was 24 cents per share, exceeding Wall Street expectations of 23 cents, according to Reuters Estimates.

Revenue rose 5 percent to $11.56 billion, ahead of Wall Street forecasts of $11.45 billion.

The New York-based company has “made the key decisions that will enable us to run AOL’s access and audience businesses separately beginning in 2009,” Bewkes said in a statement.

Shares of Time Warner have fallen 14 percent this year, less sharply than the 32 percent drop for rival News Corp. (NYSE: NWS), as investors were hoping for a lift when Time Warner sheds AOL.

AOL revenue fell 16 percent, reflecting a 29 percent fall in subscription revenue in a quarter when it lost 604,000 subscribers. It ended the second quarter with 8.1 million U.S. subscribers.

Online advertising revenue rose 2 percent. Ad sales were buoyed by third-party ads, from deals such as a recently expanded partnership with Verizon Wireless. However, those sales offset a decline in display advertising on AOL-owned sites — despite efforts at boosting both ad sales and visitors as part of the unit’s sweeping turnaround plan. Operating income fell 36 percent.

Revenue from Time Warner Cable Inc. (NYSE: TWC), Time Warner’s cable division, rose 7 percent to $4.3 billion and operating profit rose 4 percent from gains in new broadband, digital phone and video customers. It lost 9,000 basic video customers in the quarter.

Film division revenue rose 14 percent and operating income rose 16 percent from the hit movie “Sex And The City” and higher contributions from home videos “I Am Legend,” “10,000 B.C.” and video games including “LEGO Indiana Jones.”

Cable networks revenue rose 9 percent from a 10 percent rise in subscription revenue and 11 percent gain ad revenue. More viewers and higher ad rates at Turner Broadcasting’s entertainment and news networks boosted ad sales. Operating profit rose 18 percent.

The company affirmed its full-year forecast that adjusted operating income before depreciation and amortization would rise 7 percent to 9 percent, with earnings per share from continuing operations coming in at $1.07 to $1.11.

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