Time Warner to split AOL in two, beats estimates

People walk in front of the Time Warner Inc. headquarters building at Columbus Circle in New York October 13, 2005.

NEW YORK (Reuters) - Time Warner Inc said it would split AOL's dial-up Internet and advertising businesses into separate divisions by early 2009, a move that could make a sale or merger of either business easier.

The media conglomerate also reported a lower quarterly profit, dragged by AOL, but it still edged past Wall Street expectations on strong ad sales from its cable TV networks such as CNN and films like "Sex and the City."

The AOL split underscores Time Warner's focus on creating content rather than distributing it. "As we continue to reshape Time Warner, we'll increasingly focus on our goal to create and manage high-quality branded content," Chief Executive Jeffrey Bewkes said.

The company has said it plans to shed its cable services division, Time Warner Cable, by the end of the year, in a separation that will yield a $9.25 billion payment from its cable division.

Time Warner Chief Executive Jeffrey Bewkes declined to say how the company planned to spend the cash. But he said the company could pursue global acquisitions in areas it currently operates, such as TV and online networks or entertainment production companies.

Time Warner has also been in talks to combine the AOL advertising business with either Yahoo Inc or Microsoft Corp, while EarthLink Inc signaled last week that it could be interested in buying dial-up businesses.

"A separation of AOL would eliminate what's been a drag on growth and a management distraction," said Christopher Marangi, associate portfolio manager at Gabelli & Co, a Time Warner investor.

AOL revenue fell 16 percent in the second quarter to $1.06 billion, reflecting a 29 percent drop in subscription revenue.

Executives said AOL's ad growth rates will rise in the second half of the year partly due to improved traffic to its owned and operated sites and partly due to easier comparisons to the same period last year when growth rates fell.

Online advertising revenue rose 2 percent, as growth in ads displayed on sites not owned by AOL offset a decline in display ads on AOL-owned sites. Operating income fell 36 percent.

"Some of (Time Warner's) businesses most exposed to advertising, like a lot of the other companies that reported so far, did worse on revenue, but had other revenue sources like subscriptions to offset that," said David Joyce, analyst at Miller Tabak & Co LLC.

CABLE, FILMS BOOST RESULTS

Time Warner's 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, a book club joint venture with Bertelsmann AG.

Excluding items profit was 24 cents per share, exceeding analyst 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.

Time Warner affirmed its full-year forecast that adjusted operating income before depreciation and amortization would rise 7 percent to 9 percent, though it said growth would most likely come at the low end of that range. It saw earnings per share from continuing operations at $1.07 to $1.11.

The second quarter was another reminder of why the owner of HBO, Time Inc and Warner Bros is keen on structural changes to put its movies and cable programming back in the spotlight.

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, helped by a 10 percent rise in subscription revenue and 11 percent gain in ad revenue. Maintaining that ad sales growth rate would be difficult.

"While continuing to deliver double-digit gains may prove increasingly difficult, we do feel very, very good about how things are pacing at Turner," Time Warner Chief Financial Officer John Martin said.

Lehman Brothers analyst Anthony DiClemente said industry-wide ad sales are deteriorating across the board this year. "Local advertisers are much more vulnerable," DiClemente said, highlighting News Corp and CBS Corp's results in the quarter ending June 30. But that "doesn't mean national advertisers are not also seeing weakness spill over."

Revenue from Time Warner Cable rose 7 percent to $4.3 billion and operating profit rose 4 percent from gains in new broadband, digital phone and video customers.

Shares of Time Warner have fallen 13 percent this year, less sharply than the 31 percent drop for rival News Corp, as investors were hoping for a lift when Time Warner sheds AOL.

Time Warner shares fell 4 cents to $14.84 on the New York Stock Exchange.

(Editing by Lisa Von Ahn and Derek Caney)