UPDATE 2-Martha Stewart posts profit; ad outlook cautious

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By Robert MacMillan

NEW YORK, July 29 (Reuters) - Martha Stewart Living Omnimedia Inc (MSO.N: Quote, Profile, Research) reported a higher-than-expected quarterly profit on Tuesday because of better magazine advertising sales, but said the second half of the year might be difficult for the overall ad industry.

The company built around lifestyle guru Martha Stewart said it had performed well despite challenging business conditions, but that the latter portion of the year could see "headwinds" in the advertising industry, an indication that things could get worse.

"I think (advertising) is decelerating and it's decelerating at a more rapid pace than we expected," RBC analyst David Bank said. "There's a broader macroeconomic challenge ... and probably secular challenges on the print magazine business which are really being exacerbated by the economic challenge."

Second-quarter net income was $328,000, or a penny a share, compared with a year-earlier loss of $6.7 million, or 13 cents a share.

Excluding corporate costs and a noncash accounting charge, profit was 5 cents a share, beating analysts' average forecast by a penny, according to Reuters Estimates.

Revenue rose 5 percent to $77.1 million. Ad revenue at the publishing group rose 6 percent.

But the company said advertising revenue could fall 15 percent in the third quarter from a year earlier.