Aug. 1 (Bloomberg) -- Time Warner Inc., the world's largest media company, said second-quarter profit gained 5.2 percent on higher cable revenue. The shares fell the most in five months after sales at the AOL Internet unit plunged 38 percent.

Net income rose to $1.07 billion, or 28 cents a share, from $1 billion, or 24 cents, a year earlier, New York-based Time Warner said today in a statement. Sales rose 6 percent to $11 billion. The company announced a $5 billion stock buyback.

AOL's sales fell after a 16 percent rise in ad revenue failed to make up for the loss of 1.1 million customers. Revenue dropped at the Warner Bros. studios and was unchanged at Time Inc., the world's biggest magazine publisher. Cable sales increased 59 percent after the acquisition of customers in Los Angeles and Dallas from Adelphia Communications Inc. last year.

``The revenues disappointed for all divisions except cable,'' said David Joyce, an analyst at Miller Tabak & Co. in New York. He has a ``buy'' rating on the shares and doesn't own any. ``AOL needs to do even better in ad revenue growth.''

Shares of Time Warner, also owner of the CNN cable-TV news channel and People magazine, fell 62 cents, or 3.2 percent, to $18.64 at 4:01 p.m. in New York Stock Exchange composite trading. They have dropped 14 percent this year.

Excluding some charges and gains, earnings were 22 cents a share, exceeding a 20-cent average of 18 analyst estimates compiled by Bloomberg.

AOL Drop

Sales at AOL fell to $1.3 billion as the division ended the quarter with 10.9 million paying U.S. subscribers. Online ad sales totaled $522 million, missing a prediction by Sanford C. Bernstein's Michael Nathanson, the top-ranked media analyst by the Institutional Investor magazine. The 16 percent growth in ads trailed his 27 percent estimate and the 58 percent growth Google Inc. reported for the second quarter.

To lure users and advertisers, AOL started offering e-mail and other services for free last year. Chief Executive Officer Richard Parsons, 59, hired NBC veteran Randy Falco as CEO of AOL in November to implement the free-service strategy. The division, based in Dulles, Virginia, has since upgraded products such as its instant messaging service.

``This is the first weak quarter they have had since they initiated the free ad-based strategy,'' said Justin Sumner, an analyst at Sentinel Asset Management in Montpelier, Vermont, which owns more than 1 million shares of Time Warner.

The company said today that ad sales growth in the second half will slow from the rate of the first half.

Tacoda Purchase

AOL said last week that it agreed to buy closely held Tacoda to track consumers' online behavior and come up with more targeted Internet advertising based on those preferences. The $275 million acquisition is the third this year aimed at boosting AOL's advertising.

Parsons has grappled with declining revenue at AOL, six years after the Internet unit bought Time Warner in a transaction that led to record losses in 2002. Parsons plans to decide by year-end whether the AOL's free strategy is working.

``We're on the right track,'' he said on a conference call. ``AOL is reasserting itself as a leader in the online advertising space and we're doing the things that will cement that.''

Time Warner expects to complete half of its new stock repurchase by January, Parsons said. Time Warner completed its previous $20 billion buyback at the end of the second quarter.

The company also reiterated its forecast for earnings of $1.07 a share this year. Analysts anticipate 98 cents a share, according to 21 estimates compiled by Bloomberg.

Cable Gains

Time Warner Cable Inc., more than 80 percent owned by Time Warner, was the fastest-growing business for the 14th straight quarter. Operating profit gained 31 percent to $711 million as sales rose to $4 billion. Net income fell 7.2 percent to $272 million, or 28 cents a share, because of rising interest costs, the company said in a separate statement today.

The division plans to acquire more cable systems over the next two years, Parsons said in June.

The film unit's profit fell 43 percent to $81 million. Analysts including Nathanson said before the report that the division's earnings were reduced by costs of advertising the latest Harry Potter movie, as well as ``Ocean's 13'' and ``Rush Hour 3,'' in theaters this month.

``Harry Potter and the Order of the Phoenix,'' released July 11 in the U.S., cost $150 million to make and has so far earned $699 million in ticket sales worldwide, according to researcher Box Office Mojo, based in Burbank, California.

Sales at Time Warner's cable-TV networks, including TBS, TNT and Cartoon Network, fell 1 percent to $2.6 billion after the close of the WB Network last year.

Time Inc.'s profit rose 13 percent to $256 million on $1.25 billion in sales. The unit, which publishes Fortune and Sports Illustrated, has cut about 900 jobs in 1 1/2 years to increase earnings as ad sales growth slows.

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

Last Updated: August 1, 2007 16:27 EDT