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Time Warner Profit Lower in Second Quarter

Updated 3:10 p.m. ET

Time Warner reported lower second-quarter profits because of
a drop in its film and publishing revenue.

Ad revenues at Time Warner's TV networks rose just 2%,
partly because of plummeting primetime ratings at CNN, which began a management
shakeup with CNN Worldwide president Jim Walton announcing his departure last

"Although CNN's ratings declined in part due to very
difficult comparisons with last year, to be clear, we are not satisfied with
CNN's ratings performance and we're focused on fixing it," Time Warner CEO Jeff
Bewkes said on the company's earnings conference call with analysts Wednesday.

"We're going to do a better job putting on programming that
will hold the audience," Bewkes said. "If you ask where are we aiming, how do
we plan to do that, [there's] strong demand for objective, comprehensive nonpartisan
coverage, really covering all the partisan views as well. But we need to do it
in a very compelling, more engaging way than we've been doing of late."

The company also said that for ad revenues, the third
quarter would be a tougher one, although things would pick up again in the
fourth quarter. And longer term, the company was looking for big increases in
subscriber fees for Turner's cable networks.

In the second quarter, Time Warner's income fell 33% to $430
million, or 44 cents per share, down from $638 million, or 59 cents per share,
a year ago.

Revenues fell 4% to $6.7 billion.

The company left its full-year guidance for revenues and
earnings unchanged.

At Time Warner's network division, adjusted operating income
rose 9% to $1.1 billion as revenue growth exceeded programming growth of 3%.
The increase in programming costs was the result of higher sports payments and
more original series.

Revenues rose 4% to $3.6 billion. Subscription revenue rose
6% and ad revenues rose 2%. Content revenues were down 5%.

Ad revenues at Turner were helped by higher pricing and an
increase in the number of NBA games. Time Warner CFO John Martin said that
domestic ad revenue growth was 6%, similar to first quarter, despite the
decline at CNN, where ratings were lower.  Also affecting revenues were the timing of the
NCAA Men's Basketball Tournament and a shift of and from Turner
to Time Inc.

International ad revenues were down by high single digits,
hurt by the shutdown of an operation in India and unfavorable foreign currency

Martin warned that Time Warner was not expecting to report
positive growth in ad revenues in the third quarter, but he added that the
company expects a "much, much stronger Q4."

In addition to the website shifts, which will continue to
affect ad revenues, and the shutdown of the Indian operations, plus another in
Turkey, "third-quarter scatter demand is a little slow right now," Martin said.
He attributed that to money being diverted to the Summer Olympics.

At the same time, Turner expects to have fewer Major League
Baseball games in this year's third quarter than a year ago. There will be more
in the fourth quarter, plus this year Turner has the American League Championship
Series, which usually get higher ratings than the NLCS, he said.

"We also expect growth to be stronger in the fourth quarter
as we'll benefit from additional NBA games on TNT, the 2012 presidential
election, expectations of improved overall ratings at our other networks in
general, some easier comparisons and the expectation of a much stronger scatter
market once the Olympics are over," Martin said.

Martin said it was too early to predict how much ad sales
would increase in the fourth quarter, "but we feel much better about the
advertising trends going into the fourth quarter and frankly as we progress
into 2013."

Bewkes added that Turner wrapped up "a very successful
upfront." He said "once again we negotiated CPM and volume increases at the top
end of the entire television business on both broadcast and cable network."

Turner's Cartoon Network has also been posting ratings gains
as Viacom's kid business leader Nickelodeon has suffered. "We have solid prices
in the kids upfront.  We're able to take
advantage of our ratings growth," Bewkes said.

On the affiliate revenue side, Bewkes said that "between
2013 and 2016, we'll enter negotiations with just about every distributor for
just about all our basic cable networks, making it our biggest affiliate renewal
cycle in years."

He said that "based in part on the deals we've already
struck we have every confidence that Turner will grow domestic subscription
revenue at a double-digit pace annually between 2013 and 2016."

Bewkes also said that Time Warner is in discussions with
Google about the fiber cable service it is launching. Channels from
NBCUniversal, Viacom and Scripps are already on the service.

"We are in pretty good discussions with them and are
optimistic we'll be able to reach a deal," Bewkes said.

While Time Warner has reaped about $250 million in digital
streaming syndication deals, HBO is not likely to do a deal with Netflix. "Like
all subscription VOD services -- HBO, Showtime, Netflix, Amazon Prime -- they
all compete, and that's probably the primary way that they have relationship is
as competitors," Bewkes said. "But as you know, in the television and media
business sometimes there are ways for other relationships to emerge over time.
Not now, but we'll see in the future."

Martin added that the Warner Bros. TV studio also had a
strong quarter. "TV revenue was up more than 20% year-over-year to more than $1
billion and operating income was up double-digits," thanks in part to the beginning
of cable syndication of The Mentalist.
"That's the seventh time in the last eight quarters where we had double-digit
growth in TV."

Analyst Michael Nathanson of Nomura Securities said was not
overly impressed. "We do not believe these results will drive excitement to the
TWX story. We continue to look for signs of stronger affiliate fee growth and
sustainable ratings improvements at TNT and TBS," he said.

Todd Juenger of Sanford C. Bernstein, said "we believe TWX
margins will face pressure as content costs rise. At Turner, we believe
affiliate fees will grow at roughly the same rate as operating expenses, with
advertising growing more slowly." Juenger also said "we believe HBO will find
it hard to grow subs or pricing in a world that includes multiple SVOD entrants
at significantly lower price points, while cost pressures will also
intensify."  But he added "We love Warner
Bros.' TV production business."

Bewkes started the conference call by acknowledging the
movie theater shootings last month. "I want to express our profound sadness
about the terrible event at the screening of the Dark Knight Rises in Colorado two weeks ago," he said. "Our deepest
sympathies go out to the victims of this appalling crime, to their families and
their loved ones."