AOL Time Warner Q2 revenues disappoint

Reshma Kapadia

NEW YORK: AOL Time Warner on Wednesday reported disappointing second-quarter
revenues, sending its stock to its lowest level in three months on fears the
Internet and media giant may be starting to feel the pinch from the slump in
advertising spending.

But earnings, excluding a range of costs, rose to the high end of Wall Street
expectations as it cut expenses and integrated units following the merger of
America Online and Time Warner earlier this year. Its net loss also narrowed to
$734 million.

AOL Time Warner - the world's biggest Internet and media company with artists
like Madonna and Faith Hill, hit shows like "The Sopranos" and People
magazine - also raised its 2001 cash earnings outlook, but hedged on its revenue
guidance for the year.

The company said revenues rose 3 per cent to $9.2 billion from $8.9 billion a
year earlier, below the consensus estimate of $9.74 billion compiled by research
firm Thomson Financial/First Call.

Analysts attributed the lighter revenues to the ad slump and lackluster
performance by its music and film units.

"The company missed at the revenue line and reported what you would
characterize as a messy quarter, which is not altogether unexpected due to the
economic environment," said Wit/Soundview analyst Jordan Rohan.
"Nobody is immune to broader economic trends."

Its shares fell $4.90, or nearly 10 per cent, to $44.55 on the New York Stock
Exchange, where it was the most active issue. The company's shares are down
nearly 15 per cent from a year ago but up 43 per cent from the beginning of this
year, outperforming relative to the American Stock Exchange's Internet index.

AOL Time Warner, which until now had been able to shake off the advertising
slowdown hitting many of its peers because of a wide array of assets, said its
net loss narrowed to $734 million, or 17 cents a share, from $924 million, or 22
cents a share, a year earlier.

Year-earlier results were calculated on a pro-forma basis, which assumes
AOL's purchase of Time Warner had already been completed.

Cash earnings, a measure watched by analysts that excludes amortization of
goodwill and charges, rose to 32 cents a share from 23 cents a share a year
earlier, at the top end of Wall Street expectations. Analysts had expected
earnings between 14 cents and 32 cents, with a consensus at 28 cents a share,
according to First Call/Thomson Financial.

Outlook

Chief financial officer Mike Kelly raised 2001 cash earnings growth
estimates to 35 to 40 per cent or $1.28 to $1.32 a share from 25 to 30 per cent
growth. Wall Street analysts, on average, had expected the company to post
earnings of $1.23 a share for the full year, according to First Call.

Chief Executive Gerald Levin reiterated the company's 2001 financial targets
of $40 billion in revenue and $11 billion in earnings before interest, taxes,
depreciation and amortization. EBITDA, which AOL Time Warner uses as a measure
of cash flow, grew 20 per cent to $2.5 billion in the second quarter.

However, in a call with analysts, Kelly said AOL Time Warner was looking at
its $40 billion revenue target as the top of the range, assuming only a slight
upturn in the ad market in the second-half at its networks and publishing units.

Some analysts had already softened 2001 EBITDA targets. Levin told Reuters
that while he thinks the ad picture has stabilized and bottomed, he has not seen
an upturn yet and rejected some analysts' comments that the company was feeling
the pain its rivals have seen in recent quarters. "There is nobody (else)
who can deliver 20 per cent EBITDA performance, 28 per cent margins and the kind
of free cash flow growth of 55 per cent," Levin said, replying to comments
that the company was beginning to feel pressure from the economy.

"I don't call that feeling pain at all. And, when we are reiterating our
guidance for the year, that's pretty significant," he said. Subscription
revenues from units such as its flagship AOL Internet service and cable
television group grew 10 percent, with worldwide membership growing by 1.3
million to 30.1 million. But overall and ad commerce revenues grew only 1
percent to $2.3 billion.

"There was weakness in every division except cable, with music
especially bad," said Fred Moran, an analyst at Jefferies. The company's
publishing and networks group - home to Time and Sports Illustrated and CNN and
WB - felt the brunt of the ad slowdown that has been a result of the economic
slowdown.

But even AOL, called the crown jewel by executives, saw revenues grow 13 per
cent - slower than some analysts' estimates for about 20 per cent growth.

Time Warner Cable delivered one of the more solid performances, posting 14
per cent revenue growth and 13 per cent EBITDA growth and benefiting from
increasing demand for digital video and high-speed Internet services, analysts
said.

The entertainment units put in a lackluster performance, but executives
promised a much better second half thanks to a slate of pending releases,
including "Harry Potter and the Sorcerer's Stone" and new albums from
Kid Rock and Jewel.

"Cost management"

To deliver that promised bottom-line growth, executives said the company was in
"permanent cost management" mode.

"The cost reduction and efficiencies we've seen so far have far exceeded
our expectations so we are far ahead of cost reduction programs," Kelly
said. "We are finding more costs. Frankly, we are being ruthless and
driving efficiencies in this organization and we will continue to do that."

However, some analysts worried about the cost at which earnings growth would
come. "This is not an industry driven by what revenue numbers are, but the
difficulty is that over time you can't sustain double-digit EBITDA growth or
even cash EPS growth with anemic low single digit revenue growth," said
Jeffrey Logsdon, senior analyst at Gerard Klauer Mattison & Co. in Los
Angeles.

The company said greater efficiency and cross-promotions, such as the many
marketing pacts it has signed such as a deal with WorldCom Inc. announced
Wednesday, helped boost cash earnings.

Executives said as the nation's second largest advertiser, the company was
also able to use its own inventory to promote its brands and services rather
than sell it at cheaper ad rates in the current climate.

"They were using their own platforms to promote their products in a weak
ad market. That goes a long way to attesting to the diversity, underlying
strength and operating dynamics of the company," said UBS Warburg analyst
Chris Dixon.

Some analysts believed the market was overreacting.

"The fact that they raised guidance on their cash EPS is encouraging but
at same time I can see the top line could be threatened, if temporarily,"
said James Goss, analyst at Barrington Research. "But given the climate
they are dealing with and I thought it was a good performance."

(C) Reuters Limited 2001.