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NEW YORK (CNN/Money) -
Time Warner Inc. provided proof Wednesday that its cable strategy is paying off and an online advertising boom is bolstering its Internet service.
And just two months after media and market speculation about a potential breakup of the world's largest media conglomerate, no one's talking about that now.
New York-based Time Warner posted improved operating earnings that edged past Wall Street expectations and reaffirmed its full-year earnings guidance.
The owner of America Online, the Warner Bros. movie studio, and various print, television and interactive properties -- including CNN/Money -- said it earned $860 million, or 18 cents a share, from continuing operations, excluding special items. That's up from $712 million, or 15 cents a share it earned on that basis a year earlier.
Analysts surveyed by earnings tracker First Call were expecting earnings per share of 17 cents.
"It was a good quarter," said Rob Sanderson, an analyst with American Technology Research Group. "There's not a lot of things to look at on the negative side."
Revenue at the company gained 3 percent to $10.5 billion. That topped the First Call forecast of $10.3 billion.
While the growth wasn't spectacular, analysts noted Time Warner was facing some difficult comparisons from a year earlier, especially in its movie studio unit which had strong results from the final installment of "The Lord of the Rings" trilogy.
And they said Wednesday that they were impressed with solid subscriber gains in the company's cable operations and signs that the online advertising boom generally is helping to offset deepening subscriber losses at AOL.
Shares of Time Warner (Research) shot up nearly three percent in morning trading.
The earnings report comes just two weeks after a $17.6 billion offer from Time Warner and Comcast (Research) won a bidding war for the cable assets of bankrupt Adelphia Communications.
It also comes nearly two months after Time Warner rival Viacom (up $0.78 to $35.90, Research) said it was exploring splitting into two separately traded companies. The surprise announcement fueled speculation about possible breakups of other media giants, Time Warner included.
Breaking up hard to do
Three analysts interviewed Wednesday said they considered the possibility remote that Time Warner would split. "I don't see the rationale," said Sanderson, "And I don't see any motions out of management to suggest that they really feel the need to do this for any reason."
The subject of a divestiture didn't come up during Time Warner's earnings call with analysts.
"This is a very exciting time for our company and the year is off to a great start," CEO Richard Parsons said during a conference call Wednesday.
Another piece of good news: Time Warner pocketed $940 million in the quarter from the sale of its Google (up $3.55 to $229.74, Research) stock, bringing the company's total payout from its investment in the flourishing search engine giant to $1.1 billion. Time Warner used the proceeds to pare debt, now estimated at approximately $14 billion.
Revenue increased in each Time Warner unit, except for Internet service provider America Online.
At AOL, lower subscriber revenue resulted in an overall decline of 3 percent, even with improved advertising revenue. AOL lost 549,000 U.S. subscribers in the quarter, continuing the trend that has seen the number of subscribers decline by 2.3 million in the last year to 21.7 million.
However, operating income at AOL was up 17 percent, the best percentage gain in profit at any of Time Warner's divisions.
The company's Time Warner cable unit saw the strongest revenue gain, up 10 percent from a year earlier, as operating income also gained 10 percent.
Time Warner has bet heavily on drawing cable customers with a "triple play" service package, which includes digital video, data and voice services. Parsons said Wednesday that the company added more than 150,000 new digital phone subscribers in the first quarter, with 15,000 new signups a week.
Assuming the Adelphia deal receives the requisite regulatory approvals and closes, Time Warner estimates its cable unit will gain about 3.5 million basic subscribers from the deal, bringing its total basic subscribers to about 14.4 million on pro forma basis.
Once the deal is final, Time Warner Cable will be publicly traded with Time Warner as the majority shareholder,
"I like it. I like it a lot," said analyst Greg Gorbatenko of Marquis Investment Research, speaking generally about Time Warner's results. As for cable specifically, "these guys are really starting to get some good momentum," he said. For the time being, "it's really their game to lose."
Tough comparisons for film; picture mixed for mags
The movie business, Time Warner's largest division, was the only one to report a lower operating income, down 2 percent on a 1 percent rise in revenue. The division, which includes Warner Bros. and New Line Cinema, had difficult comparisons to a year earlier when "The Lord of the Rings: Return of the King" was in theaters.
The networks unit, which includes broadcast network WB as well as cable networks CNN, TNT and TBS, reported a 4 percent rise in revenue and a 7 percent gain in operating income.
Publishing, which includes magazine unit Time Inc., posted an 8 percent increase in revenue and an 11 percent rise in operating income. Time Warner CFO Wayne Pace said ad revenue increased 10 percent in the quarter due to strength at People, In Style and Real Simple magazines. Advertising has weakened, he said, at other core titles, including Sports Illustrated and Fortune.
Joseph Bonner, an analyst with Argus Research Group, said there were no surprises in Time Warner's overall performance. "I'm cautiously encouraged," said Bonner, who has a "buy" rating on the stock. "The results were good, but I wouldn't say shouting-from-the-rooftops good."
The company repeated its earlier statement that it is looking for operating income excluding special items, depreciation and amortization to post a high-single digit percentage gain in 2005 from the $9.9 billion it made on that basis in 2004. It expects to convert between 30 to 40 percent of that income into free cash flow.
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Analysts quoted in this story do not own shares of Time Warner and their firms have no investment banking relationships with the companies.
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