Good times for Time Warner

NEW YORK (CNNMoney.com) -- Time Warner, the world's largest media company, reported better-than-expected earnings for the first quarter Wednesday thanks to robust results from its cable business and improved profits at its AOL division.

Shares of Time Warner (Charts, Fortune 500) gained more than 2.5 percent in early morning trading on the New York Stock Exchange. Time Warner's stock has outperformed the broader market in the past 12 months, but the stock has lagged its other major media rivals so far this year.

Time Warner chairman and CEO Dick Parsons announced solid first-quarter results for the world's largest media firm.

Time Warner has outperformed the broader market in the past 52 weeks...

...but the stock has trailed the performance of other media rivals so far in 2007.

The New York-based company, which is also the parent of CNNMoney.com, reported sales of $11.2 billion, in line with analysts' forecasts, and up 9 percent from a year earlier.

Net income fell 18 percent to $1.2 billion, or 31 cents a share. After excluding gains from asset sales, profit came in at 22 cents per share, topping Wall Street's consensus estimates of 20 cents a share.

Time Warner's adjusted operating income before depreciation and amortization, or OIBDA, a closely watched measure of profitability, also beat expectations, rising 19 percent to $3.1 billion. Analysts were expecting adjusted OIBDA of $3 billion.

The company also said that it was reaffirming its forecast of adjusted OIBDA growth in the mid-to-high-teens for all of 2007.

"Time Warner is off to a strong start this year. Our first quarter results put the company firmly on track to meet all of our full-year financial objectives," said Time Warner chairman and chief executive officer Dick Parsons in a statement.

Strength at the company's newly public Time Warner Cable unit led the gains at Time Warner, thanks to healthy increases in subscribers for digital cable, digital phone and high-speed Internet access services.

Time Warner Cable (Charts), which was partially spun off in March following the acquisition of bankrupt cable provider Adelphia by Time Warner and Comcast (Charts), reported revenue of $3.85 billion, up 61 percent from a year earlier and adjusted OIBDA of $1.31 billion, an increase of 54 percent from the same period last year.

Time Warner still owns a majority of its cable unit, which accounted for more than a third of total revenue and about 41 percent of Time Warner's overall adjusted OIBDA.

During a separate Time Warner Cable conference call with analysts, Time Warner Cable chief executive officer Glenn Britt said the company is on track to complete the integration of the Adelphia assets that it acquired, including cable systems in Los Angeles, Cleveland and Buffalo.

Time Warner Cable has been criticized by customers in these markets since digital upgrades caused some service disruptions. As such, Time Warner Cable said it lost about 20,000 basic cable subscribers in the newly acquired systems during the first quarter.

But Britt maintained that Time Warner Cable was working on adding new features such as digital phone to all of its acquired customers by the end of the year.

And one analyst said that despite the Adelphia integration problems, the results for Time Warner Cable could have been worse.

"Time Warner Cable expectations were low in the wake of well-publicized integration concerns about Los Angeles and other acquired systems," wrote Sanford C. Bernstein & Co. analyst Craig Moffett in a report. "Today's results should also put those integration concerns into better perspective. Even continued subscriber losses in acquired systems weren't enough to restrain overall growth, which beat expectations on all important metrics."

The company's AOL division also reported a surprisingly strong increase in profit thanks to a boost in online advertising sales. Overall revenue fell 25 percent at AOL due to declining subscriptions but advertising sales soared 40 percent from a year earlier, helping to boost AOL's adjusted OIBDA by 27 percent.

"Our confidence in AOL keeps growing," said Parsons during a Time Warner conference call with analysts.

AOL is in the midst of a turnaround as the company focuses less on paid subscription services. AOL announced in October that it would stop charging broadband customers fees for e-mail and other services in order to try and cash in on the growth in online advertising that has boosted the fortunes of companies such as Internet search leader Google (Charts, Fortune 500).

Spencer Wang, an analyst with Bear Stearns, wrote in a research note after Time Warner's earnings were released that he was pleased with the results from AOL.

Wang pointed out that the AOL transition is "moving along" and that growth from the division's Advertising.com network was probably the biggest reason for the increase in online advertising sales.

Looking at Time Warner's other businesses, the company's movie and TV studios reported a 1 percent decrease in revenues and 27 percent decrease in adjusted OIBDA, despite the box office success of the movie "300." Time Warner said weaker DVD sales were the reason for the declines.

During the Time Warner conference call, Time Warner chief operating officer Jeff Bewkes said he expected that this would be a strong summer at the box office for Time Warner, which is releasing the latest movie in the "Harry Potter" franchise in July.

Time Warner's networks business, which includes CNN and HBO, reported flat sales and a 6 percent increase in adjusted OIBDA. And Time Warner's publishing division, which sold 18 magazines in March, posted a revenue decrease of 1 percent and adjusted OIBDA decline of 28 percent.

Time Warner is the first major media company to report earnings, and the results come at a time of increased speculation about consolidation throughout the industry. Time Warner rival News Corp. (Charts, Fortune 500) announced Tuesday that it was offering $5 billion for Dow Jones (Charts), the publisher of The Wall Street Journal.

In addition, the Dolan family, founders of Long Island, N.Y.-based cable provider Cablevision (Charts, Fortune 500), which several analysts have said could make an interesting takeover target for Time Warner, announced Wednesday that they have agreed to take Cablevision private.

During the Time Warner conference call, Parsons said that Time Warner would like to pursue more deals in the cable business and that if the Dolans ever wanted to sell Cablevision, Time Warner would like to talk to them about buying it.

And in the world of online advertising, Google announced last month that it was buying Advertising.com competitor DoubleClick for $3.1 billion while Yahoo said earlier this week that it was buying the 80 percent stake in online ad exchange Right Media that it didn't already own, for $680 million.

The reporter of this story owns shares of Time Warner through his company's 401(k) plan.