Cable Rare Bright Spot for Time Warner

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Strong growth in its cable operations wasn’t enough to offset declines in filmed entertainment and cable networks at Time Warner Inc., as revenue declined by 1% and adjusted operating income before depreciation and amortization dipped 3% in the second quarter.

Fueling the declines was poor performance at its film unit -- revenue was down 15% and adjusted OIBDA dropped 45% on difficult comparisons with the year-ago period, when the studio released blockbusters in its Lord of the Rings and Harry Potter series of films.

At the company’s cable networks, revenue rose 5% but adjusted OIBDA declined 4%, mainly due to higher programming and marketing costs at its Turner Broadcasting System Inc. division for new original series and sports.

Time Warner Cable operations were the bright spot, however. Revenue rose 11% and adjusted OIDBA increased 10%, driven mainly by subscriber growth in new services. Basic subscribers declined by 5,000 in the seasonally weak period, an improvement over the 10,000 basic customers lost a year ago.

Digital-cable customers increased by 144,000, the MSO’s biggest growth since the first quarter of 2003, and high-speed-data subscribers rose by 201,000, the operator’s second straight quarter of 200,000-plus subscriber growth.

All eyes were looking toward Time Warner Cable’s digital-telephone additions, and the second-largest MSO in the country outpaced analysts’ expectations, adding 242,000 voice customers during the period. Most analysts had expected the cable giant to add about 180,000.

But that stellar performance was overshadowed by a $3 billion charge Time Warner Inc. took during the period as part of a settlement for class-action lawsuits against the company concerning alleged revenue discrepancies at its America Online Inc. division dating prior to AOL’s merger with Time Warner Inc. in 2001.

Time Warner Inc. agreed to pay $2.4 billion in cash as part of the settlement and placed another $600 million in cash in reserve to settle any other additional lawsuits. As a result, the company reported a net loss of 7 cents per share, compared with a profit of 19 cents in the same period last year.

Time Warner Inc. chairman and CEO Richard Parsons said on a conference call with analysts to discuss second-quarter results that the charge was made to avoid any further litigation costs.

“By acting now to put this matter behind us, we avoid the cost and distraction of protracted litigation,” he said on the call.

And while the overall results were disappointing, Parsons said things are not exactly what they seem.

“Our operating-earnings growth did not reflect the underlying vitality of our businesses,” Parsons said, adding that the film unit was hit especially hard by the poor opening-box-office performance of The Island, which forced the company to take a write-down in the second quarter.

“Except for that, our results were essentially right in line with our expectations,” he added.

Parsons said that as evidence of the company’s confidence in its growth prospects -- it reiterated full year guidance of high-single-digit OIBDA growth -- Time Warner Inc.’s board of directors approved a two-year, $5 billion share-repurchase program.

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