AOL results as weak as expected

The world's largest media and Internet company said revenue for 2001 hit $38.2 billion, up from $36.2 billion the previous year. For the fourth quarter, revenue reached $10.6 billion, up from $10.2 billion in the same period a year ago.

EBITDA (earnings before interest, taxes, depreciation and amortization) for the year rose 18 percent to $9.9 billion, up from $8.4 billion in 2000. For the quarter, EBITDA climbed 14 percent to $2.8 billion from $2.4 billion in the same period a year ago.

These results do not include the pro forma effects of AOL Time Warner's acquisition of European magazine publisher IPC Media or of its remaining stake in AOL Europe.

Wednesday's news comes just two weeks after the company warned Wall Street that its earnings for the year would fall short. Since the merger was announced, AOL Time Warner's top executives have insisted that the company would generate $40 billion in annual revenue and $11 billion in EBITDA. Many on Wall Street have since faulted management for being too stubborn and not factoring in the tough advertising market.

For 2002, the company reiterated its guidance for 5 percent to 8 percent revenue growth and an EBITDA increase of 8 percent to 12 percent. The financial performance of AOL Europe and IPC Media were included in these estimates. AOL Time Warner added that revenue and EBITDA would be flat for the first quarter of 2002, compared to the same period in 2001.

"Looking ahead, we will continue, in both our U.S. and international operations, to expand our subscriber base, launch new products and services, and sustain the flow of exciting new content," outgoing CEO Gerald Levin said in a statement.

"We will also maintain our emphasis on financial discipline, pursuing further cost reductions, and productivity improvements across the company--beyond the substantial gains we made in 2001," he added.

Filling a hole Wednesday's announcement did not surprise Wall Street as AOL Time Warner had prereleased earnings this month. Still, there are elements of the businesses--most notably advertising--that continue to weigh down the company's performance.

"The big culprit is advertising, and until the advertising market picks up, the numbers will be soft," said David Lee Smith, an equity analyst at RBC Capital Markets. "But there's nothing surprising. I don't see anything that gives me any great pause."

AOL Time Warner said total advertising and commerce revenue for 2001 declined 3 percent to $8.5 billion.

One telling sign of how badly the ad slump affected the company is its increase in cross-promotional spending. In 2001, the company's various divisions spent $2 billion on one another, up from $1.2 billion last year. Although this amount is not included in 2001's $38.2 billion in revenue, it does highlight an increase in unsold advertising spots that needed to be filled with AOL Time Warner's own promotions.

Company executives have continually emphasized how merging America Online and Time Warner would allow the combined entity to boost its various businesses through cross-promotional campaigns. However, the success of these efforts is difficult to measure.

"One of the ways that AOL is able to meet its subscriber goals is to advertise and promote intensely on CNN, TNT and other Time Warner-owned cable networks," said Jordan Rohan, an equity analyst at SoundView Technology Group. "It's what you would expect from AOL in midst of a very soft advertising environment."

Parsons' M.O.
In the conference call with Wall Street, it was clear that the company is shifting to a more conservative, cautious tone in its outlook. Co-Chief Operating Officer Richard Parsons, who will succeed Levin in May, tempered the company's once-grandiose swagger with a sobering perspective of where AOL Time Warner is headed.

"Convergence is an evolutionary process," Parsons said, in reference to the idea of using new and traditional media companies to create new businesses. "To expect massive or radical changes in (the) short term is not practical."

During his opening remarks, Parsons also declared that AOL Time Warner's success would be pinned on how well its various divisions work as a unified entity. This is a tall order, given the historic contentious relations between Time Warner's many divisions.

"Those who persist at looking at each of the parts and valuing them as autonomous businesses over time will be increasingly mistaken," Parsons added. "That's going to be our focus--making the whole greater than the sum of the parts."