Time Warner Earns $638 Million

On the strength of its latest “Lord of the Rings” movie, Time Warner Inc. reversed a year-earlier loss to report net income of $638 million during last year’s fourth quarter.

Investors, however, were disappointed in subscriber losses at both America Online and Time Warner Cable, as well as the weak performance of the TV channels owned by the world’s largest entertainment company.

The stock was heavily traded on the New York Stock Exchange on Wednesday, falling 96 cents to $17.96.

“The numbers were a definite disappointment,” said Jessica Reif Cohen, who covers the company for Merrill Lynch. “But none of the businesses are falling apart, with the exception of AOL. Longer term, the outlook is good.”

For the quarter, Time Warner earned 14 cents a share, compared with a loss of $44.9 billion, or $10.04 a share, the previous year. The year-ago period included a $45.5-billion write-down in the value of AOL.

The quarter included a $466-million loss from discontinued operations, a $560-million pretax gain on the sale of its DVD-CD manufacturing business and a $1.1-billion write-down on the music group’s assets.

Revenue increased 6.4% during the quarter, to $10.9 billion. The film group posted a 17% increase in revenue, to $3.38 billion, fueled by “Lord of the Rings: Return of the King.”

It all gave Time Warner its first annual profit since the 2000 merger of Time Warner and America Online. It made $2.6 billion for all of 2003.

“One year ago, I said 2003 was going to be a reset year,” Time Warner Chief Executive Richard D. Parsons said during a conference call with analysts Wednesday. “I’m pleased to say that we’re past that.”

He said the focus this year would be on accelerating growth and that the company was in a position to look at potential acquisitions, although he promised to be “disciplined and patient.”

All figures exclude results from Warner Music, which the company is selling for $2.6 billion to an investor group led by Edgar Bronfman Jr. The group’s revenue and profit have been declining because of piracy. The sale will reduce Time Warner’s debt to $20 million, putting the company a year ahead of its goal.

Analysts said the weakness in several of Time Warner’s divisions was a result of investments and marketing costs that should pay off down the road.

For instance, Parsons said the rollout of digital phone service across its 31 cable systems was a “major focus” this year.

AOL’s revenue fell 7% in the quarter as about 830,000 subscribers either terminated the service or began receiving it for free. AOL still has about 24 million subscribers. Online advertising increased by $204 million in the quarter, the third consecutive quarter of growth.

Parsons said AOL hit bottom last year, though analysts expect it to continue losing subscribers.