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AOL Time Warner earnings top expectations

In its first financial report since the merger, the media giant posts earnings that exceed Wall Street's expectations.

In its first earnings report as a combined company, AOL Time Warner on Wednesday topped Wall Street's expectations.

The company, which was created from the combination of America Online and Time Warner, said earnings before interest, tax, depreciation and amortization (EBITDA) for the December 2000 quarter rose 14 percent to $2.4 billion. That's up from $2.1 billion in EBITDA from the same period in 1999.

Net income jumped 67 percent to $365 million, or 15 cents per share. Wall Street expected the company to post earnings of 14 cents per share. Revenue increased 8 percent to $10.2 billion, up from $9.5 billion last year.

AOL Time Warner chief executive Gerald Levin touted the benefits of the new combination, mainly because AOL's growth and Internet expertise will be present in all of the businesses.

"AOL for the company is the crown jewel," Levin said during AOL Time Warner's investor meeting Wednesday morning. "This is a golden franchise that can be leveraged throughout Time Warner. What we've done is plug all of our businesses into the AOL growth engine."

For example, the company announced a deal for AOL to promote new releases from artists signed onto Warner Music Group, including Barenaked Ladies, Tracy Chapman, REM and Sugar Ray. The new releases will be promoted on AOL's music and entertainment channels and distributed as MP3 files through its Winamp.com digital music player and through Web radio service Spinner.com.

Levin also said that AOL has generated nearly 800,000 new magazine subscriptions for Time Inc. through cross-promotion. Bob Pittman, AOL Time Warner's co-chief operating officer, said in later comments to investors that AOL will begin selling Time Warner Cable subscriptions through its service.

Analysts expect AOL Time Warner executives to outline additional ways the company plans to generate revenue while whittling down expenses in acquiring new subscribers.

AOL Time Warner executives have stated a goal to generate an additional $1 billion in revenue for the year as a result of merging the two companies. Last week, the company eliminated 2,400 jobs in a cost-cutting move.

AOL Time 
Warner package The company reiterated Wednesday that revenue growth in 2001 will reach 12 percent to 15 percent. Executives expect subscription revenues to grow 12 percent to 14 percent, content revenues to increase 6 percent to 8 percent, and advertising and commerce revenues to jump 18 percent to 22 percent. AOL Time Warner restated that EBITDA will grow 30 percent to $11 billion.

So far, the good news is there isn't any bad news. Earnings season for many companies has been marked by decreased revenue expectations, CEO departures, admissions of vulnerability to a sagging advertising market, and additional job cuts.

AOL Time Warner "earnings are pretty much in line," said Jordan Rohan, an equity analyst at Wit SoundView. "It doesn't look like there are any surprises, and that's a good thing. There are no proclamations of industry weakness and reduced expectations."

AOL Time Warner broke out earnings for its AOL division for the same December 2000 period. The online giant posted revenues of $2.1 billion, an increase of 27 percent from $1.6 billion in 1999. Advertising revenues rose 65 percent from last year to $741 million. Subscriptions to the flagship AOL service climbed 16 percent from last year to $1.2 billion.

The AOL service added 2.1 million new subscribers worldwide, increasing the total to 6.2 million new members. The service now has 26.7 million paid subscribers. CompuServe, the company's other online service, added 213,000 members for the quarter and 897,000 for the year. CompuServe now has nearly 3 million subscribers.

However, revenue this quarter fell slightly short of expectation. First Call's survey of analysts expected America Online to report $2.14 billion in revenue. JP Morgan H&Q equity analyst Paul Noglows blamed the revenue lag on the subscription side. He downplayed it because the shortfall was the result of marketing and distribution deals where partners would get a cut of subscription revenues in exchange for promoting the AOL service. He said the occurrence is not problematic.

"We note that the net-net result of these marketing agreements is neutral to positive to cash flow and earnings," Noglows wrote in a note to investors.