Aug. 6 (Bloomberg) -- Time Warner Inc., the world's largest media company, said second-quarter profit dropped 26 percent on lower earnings from the AOL Internet unit and Time Inc.'s magazines.

Net income fell to $792 million, or 22 cents a share, from a year earlier, when tax benefits and the sale of a books business boosted results, New York-based Time Warner said today in a statement. Sales rose 5.2 percent to $11.6 billion, topping the $11.4 billion average estimate.

AOL dragged on the results with the loss of 604,000 Web- access subscribers, and Time Inc. reported a 9 percent drop in advertising revenue. The addition of 251,000 phone customers at Time Warner Cable Inc. helped drive sales growth, along with revenue increases at the TV networks and the Warner Bros. film studio. Overall operating profit was little changed.

``AOL and publishing came up a little bit short,'' said Chris Marangi, a fund manager at Gamco Investors Inc. in Rye, New York, which owned 11.7 million Time Warner shares as of March 31 among its $28 billion in assets.

Ad sales at AOL rose 2 percent to $530 million, missing Marangi's 3 percent estimate. The unit's third-party ad network and revenue from a partnership with Google Inc. offset a 14 percent drop in display ads that appear on Web sites.

Difficulties in integrating acquisitions also hurt AOL's results, Time Warner Chief Executive Officer Jeffrey Bewkes said today on a conference call.

Bewkes' Plan

Time Warner dropped 5 cents to $14.83 at 4 p.m. in New York Stock Exchange composite trading. The stock has declined 10 percent this year and has fallen almost 70 percent since AOL bought Time Warner for $124 billion in 2001.

Profit of 24 cents a share exceeded the 23-cent average of 16 analysts' estimates compiled by Bloomberg, excluding costs related to the planned spinoff of the cable-systems unit.

Bewkes is getting rid of Time Warner Cable, the second- biggest U.S. cable-TV company, to focus on the TV networks and film business. The 56-year-old CEO merged the Warner Bros. and New Line studios and said in May he is open to selling AOL.

The New Line reorganization will yield more than $140 million in savings starting next year, while corporate cost cuts are ahead of a target to save $50 million in 2008, Bewkes said.

``We've made significant progress on our key objectives,'' Bewkes said on the call.

AOL's Future

Bewkes also said Time Warner will operate AOL's ad and dial-up Internet units separately starting next year. Sales at AOL fell 16 percent to $1.06 billion in the quarter, while profit dropped 36 percent to $230 million.

``We've been looking for the growth number to improve this quarter,'' Robin Diedrich, an analyst at Edward Jones & Co. in St. Louis, said about AOL's advertising sales. She recommends investors buy Time Warner shares and doesn't own any. ``It's getting less clear as to when it's going to happen.''

AOL projects ad revenue will rise for the rest of the year, Time Warner said in a regulatory filing today. Bewkes said the increase is based on higher usage of AOL sites.

Time Warner affirmed its full-year forecast for a 7 percent to 9 percent increase in adjusted operating profit, off a base of $12.9 billion in 2007.

Ad Strategy

In the past two years, AOL has been expanding its ad business by dropping subscriber fees to attract more Web site visitors and spending almost $2 billion on acquisitions. In May, Time Warner closed its $857 million acquisition of social networking site Bebo Inc.

AOL is suffering from an industrywide slowdown in ad spending. In July, Citigroup Inc. analyst Catriona Fallon in San Francisco cut her estimate for 2008 online ad growth in the U.S. to 16 percent from 22 percent.

In last year's second quarter, Time Warner recorded gains of $122 million from discontinued operations, including the sale of Time Inc.'s books business.

Film revenue rose 14 percent to $2.56 billion in the quarter on sales of DVDs including ``I Am Legend'' and ``The Bucket List,'' while profit gained 16 percent to $94 million. As of July 31, ``Sex and the City,'' the movie adaptation of the HBO series, had taken in $372.8 million in worldwide ticket sales since its May 30 release, according to researcher Box Office Mojo LLC, in Burbank, California.

Cable Units

Cable networks including TBS and the HBO pay-TV channel increased revenue by 8.7 percent to $2.83 billion, while profit gained 18 percent to $749 million.

Second-quarter sales at the cable-TV systems unit rose 7.1 percent to $4.3 billion. Profit increased 3.8 percent to $738 million. Time Warner Cable as well as industry leader Comcast Corp. have been taking phone customers from AT&T Inc. and Verizon Communications Inc. as they package the service with video and Web access.

Sales at the publishing unit, which includes Time magazine and Fortune, dropped 6.1 percent to $1.18 billion. Profit dropped 15 percent to $218 million.

To contact the reporter on this story: Gillian Wee in New York at gwee3@bloomberg.net.

Last Updated: August 6, 2008 16:12 EDT