July 29 (Bloomberg) -- Time Warner Inc., owner of the Warner Bros. film studio, reported second-quarter profit that fell less than analysts estimated as earnings from movies countered advertising declines at AOL and magazines.

Net income dropped 34 percent to $519 million, or 43 cents a share, from $792 million, or 66 cents, a year earlier, the New York-based company said today in a statement. Excluding some items, earnings of 45 cents a share exceeded the 37-cent average of analysts’ estimates in a Bloomberg survey.

“The Hangover,” a surprise hit at the box office that cost an estimated $35 million to make, helped boost Warner Bros.’s profit by 34 percent, more than some analysts predicted. Gains at cable-TV networks such as HBO also mitigated the ad slump in publishing and at AOL, which Chief Executive Officer Jeffrey Bewkes plans to spin off at the end of the year.

“Film had significantly better profitability than expected,” said Chris Marangi, an analyst for Rye, New York- based Gabelli & Co., who recommends buying the shares. “You shouldn’t doubt how well the networks do, but they also did better than expected.”

Time Warner has bought back 14 million shares for $348 million since April. Investors have pushed for cash returns since the company received $9.25 billion in March from the spinoff of Time Warner Cable Inc., a cable-system business. Time Warner had $7 billion in cash and equivalents as of June 30.

Bewkes said on a conference call that he would consider using cash to make acquisitions, if the balance of risk and return was more appealing that other uses, including buybacks.

Time Warner fell 49 cents to $26.52 at 4 p.m. in New York Stock Exchange composite trading. The shares have increased 19 percent this year, compared with an 8 percent gain for the Standard & Poor’s 500 Index.

Low Visibility

Sales fell 8.8 percent to $6.81 billion, missing the $6.96 billion average analysts’ estimate. The company reiterated that full-year earnings, excluding some items, may be little changed at $1.98 a share. Analysts predict $1.99 on average.

“The advertising markets where we operate have been more stable lately, but we aren’t seeing major improvements,” said Bewkes, 57. “Because advertisers are holding on to budgets longer, our visibility remains lower than usual.”

Warner Bros.’s adjusted operating income before depreciation and amortization rose to $263 million, beating the $138 million prediction of Anthony DiClemente, a New York-based analyst with Barclays Capital.

“The Hangover,” a comedy with Bradley Cooper that cost $35 million, has garnered $247.9 million in U.S. box-office sales, making it the fourth-highest grossing film this year, according to researcher Box Office Mojo LLC.

Film profit may drop this quarter from a year earlier, when Warner Bros. released “The Dark Knight,” Chief Financial Officer John Martin said on the call. The fourth quarter will be lifted by DVD releases, which will include “Harry Potter and the Half-Blood Prince” and “The Hangover”, he said.

Adjusted operating income at the cable-TV networks, which include HBO and TBS, gained 14 percent to $981 million. Ad revenue fell 3 percent, less than the 6 percent drop estimated by Alan Gould, an analyst with Natixis Bleichroeder Inc.

The cable networks’ ad sales are falling at a similar rate to the second quarter, Martin said.

AOL Advertising

Time Warner said in a regulatory filing this week that it bought back Google Inc.’s 5 percent stake in AOL on July 8 for $283 million, a fraction of the $1 billion Google paid in 2005.

AOL’s ad revenue fell 21 percent in the quarter, compared with the 20 percent drop predicted by Spencer Wang, an analyst with Credit Suisse Groupe AG. Ad revenue at the Internet division declined 20 percent in the first quarter.

The company sees no sign of recovery yet in AOL’s advertising, CFO Martin said.

Advertising sales at the publishing unit, owner of Fortune and People, fell 26 percent. They are starting to stabilize, Martin said.

Excluding results from the cable systems separated this year, the company had earnings of 47 cents a share in the year- ago quarter.

Viacom Inc., the owner of the MTV cable-TV network and the Paramount Pictures film studio, reported yesterday that second- quarter profit dropped 32 percent, and said there are signs the U.S. advertising market is improving. Viacom, based in New York, said its cable networks have sold most of their advanced advertising spots at acceptable prices.

To contact the reporter on this story: Sarah Rabil in New York at srabil@bloomberg.net

Last Updated: July 29, 2009 16:19 EDT