Time Warner Reports Higher Second-Quarter Profit

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UPDATED: The conglomerate exceeded Wall Street estimates as it once again posted growth in its TV networks unit and mixed film results, including higher film valuation adjustments due to the weaker-than-expected performance of "Green Lantern."

NEW YORK - Time Warner early on Wednesday reported higher second-quarter earnings that exceeded Wall Street estimates amid continued growth at its TV networks unit.

Before the market open, the entertainment conglomerate, led by chairman and CEO Jeff Bewkes, posted a quarterly profit of $637 million, up 14 percent compared with $560 million in the year-ago period.

TW's revenue rose 10 percent to $7.0 billion, the highest growth rate since the third quarter of 2007. Advertising revenue increased 8 percent, including an 11 percent gain at the Turner cable networks.

Based on its results, the conglomerate said it now expects at least low teen growth in its adjusted earnings per share for the full year 2011, compared to its previous target of a low teen gain.

Networks unit revenue rose 9 percent in the second quarter, and adjusted operating profit rose 5 percent. Positive factors here in the latest quarter were revenue from the NCAA men's basketball tournament, growth at Turner’s international entertainment networks and higher sales of HBO’s original programming, including True Blood and Game of Thrones. But the division also cited higher programming costs due to higher expenses for originals and the cost of the NCAA tournament.

Management on Wednesday predicted stronger ratings momentum for key networks in the fourth quarter and lauded double-digit upfront ad rate gains for TNT and TBS. Third-quarter scatter ad rates are up in the mid-teen percentage range compared to upfront levels, executives said.

Film unit revenue jumped 13 percent, but adjusted operating profit declined 6 percent. As expected, the theatrical success of The Hangover Part II and the home entertainment release of Harry Potter and the Deathly Hallows: Part 1, which led a 29 percent home entertainment gain in a typically sluggish space, boosted film unit results. And so did stronger video game revenue for such games as Mortal Kombat 9 and LEGO Pirates of the Caribbean: The Video Game.

Explaining the lower profitability, the company cited "increased pre-release print and advertising expenses, higher theatrical film valuation adjustments and increased overhead costs related in part to recent acquisitions, as well as higher restructuring and severance costs." The film valuation adjustments were were predominantly due to Green Lantern, which was released in June, but underperformed expectations in theaters, according to sources. As a result, TW had to accelerate the expense recognition time frame assumption to better match the film's revenue performance, which analysts now believe will contribute less in terms of longer-term financials.

Later in the day, TW in a regulatory filing provided some more detail on the film valuation adjustments, saying they amounted to "$50 million as a result of revisions to estimates of ultimate revenue for certain theatrical films."

Meanwhile, TW's Time Inc. publishing unit said Wednesday that all 21 of its U.S. titles, which include Entertainment Weekly, People, Time, Fortune and Sports Illustrated, will become available as tablet editions by the end of the year. It said that will make it the first major U.S. magazine publisher to make all of its magazines available on all key tablet platforms.

Also on Wednesday's call, Bewkes was asked about TW's interest in a new eight-game NFL content package. "We don't need an NFL package, but we always look at things," and sports rights must be profitable, he replied.

The HBO Go application, meanwhile, has now been downloaded close to 4 million times, and HBO Go will also come to connected TVs, game consoles and other new devices soon, according to Bewkes.

He also talked up the continued digital transition of Warner Bros., saying that "the vast majority" of future home entertainment releases starting with Green Lantern will be Ultraviolet-enabled. The Ultraviolet cloud locker for content is expected to launch later this year and allow consumers to access content they own across a range of devices. Bewkes predicted that it will "fundamentally change" how people manage and watch their movie collections and boost the value proposition of digital ownership.

Email: Georg.Szalai@thr.com

Twitter: @georgszalai