COMMENTARY--When AOL Time Warner reports its first-quarter earnings on Wednesday, you can expect a mixed bag of results and a company that's steadfast about its 2001 outlook. You can also expect chatter about a rate increase for the AOL online service.
The biggest question will be whether AOL Time Warner (NYSE: AOL) can reach its goal of $11 billion in EBITDA (earnings before interest taxes, deprecation and amortization) for the year without raising rates for its online service.
Analysts are generally mixed about the prospects for a rate increase. You may not hear much about a price increase on Wednesday's conference call, but rest assured the debate will heat up. A few analysts have already noted that AOL Time Warner will have to raise rates to meet its 2001 earnings target.
Last month, Gerard Klauer Mattison analyst Jeffrey Logsdon became the latest analyst to conclude that the company will raise subscription rates for its online service from $21.95 a month to $24.95 a month. He joins ABN AMRO analyst Arthur Newman and Merrill Lynch's Henry Blodget as analysts expecting a price increase.
Those that argue for an AOL price increase note that the company's online service has become an essential part of life--much like the telephone. AOL subscribers will endure a price increase as long as monthly fees stay in the mid-$20 range, analysts said.
Indeed, AOL is almost viewed as a necessity to many users. AOL Time Warner announced Monday that its core online service has topped 29 million subscribers, a figure that almost ensures it'll hit estimates.
Analysts on the other side of the debate contend that AOL Time Warner can't raise rates right now because the economy is soft. Higher subscriber revenue may offset slowing advertising growth for AOL Time Warner, but higher rates could hurt growth. If the economy is truly weak, consumers may think twice before becoming AOL subscribers.
My guess: An AOL rate increase is inevitable. If you buy into the argument that AOL has become a utility for many users, a rate increase is highly likely even if the economy is slow. Look around. In recent weeks, I've noticed my phone company (Verizon) and my cable company (Cablevision) have slipped in extra charges--you know a dollar here and a dollar there. Meanwhile, essentials such as commuting expenses have gone up. In the New York area, tolls have skyrocketed.
In other words, prices for essential services go up no matter what the economy does. I'd argue that with each passing day, AOL is becoming as essential as phone and cable services. As soon as AOL can roll out new features and products (possibly in the third quarter), it'll have the ammo it needs to raise rates.
Numbers to note
The funny thing about this quarter for AOL Time Warner is that the company doesn't have to do anything outstanding to please Wall Street.
"The best thing that could happen at the AOL Time Warner first-quarter earnings release would be the lack of anything dramatically different or unexpected. That lack of new news, in itself, could be somewhat comforting to battered tech and media investors," said WitSoundView analyst Jordan Rohan.
Here are AOL Time Warner's targets this quarter:
Total revenue: It will be $9.07 billion for the first quarter with a profit of 20 cents a share, according to First Call. Rohan projects first-quarter revenue of $9.02 billion with $9.79 billion in the second quarter. Newman sees $8.9 billion in total revenue.
AOL revenue: Rohan sees $2.14 billion in revenue for AOL's core online services, with ad/e-commerce sales of about $770 million.
The guidance: Analysts said they plan to tweak their financial models for AOL Time Warner, but don't expect any dramatic changes. Simply put, AOL Time Warner is expected to stick with its 2001 story.
Stupid analyst tricks
We've seen a lot of stupid analyst reports in our time, but Bear Stearns may have taken things to a new level Monday.
Webvan (Nasdaq: WBVN), the online grocer whose best delivery was its November 1999 IPO, announced last week that CEO George Shaheen has resigned as shares struggle to remain above a dime.
Shaheen, who came to Webvan with a lot of fanfare in October 1999 from Andersen Consulting, was among the last to give up on the company. His resignation wasn't much of a surprise; Shaheen left a $4 million job for a lower salary and lots of now-worthless stock.
Bear Stearns, one of the underwriters for the Webvan IPO, did make out pretty well on the Webvan IPO. So it comes as no surprise that Bear Stearns was reluctant to bail on the stock.
So reluctant that a Bear Stearns analyst cut Webvan to "neutral" from "attractive" on Monday even though shares are barely breathing. Deborah Weinswig said Shaheen's resignation wasn't much of a surprise and that Webvan is still a premier online grocer. "Our primary concern lies with the company's ability to obtain the additional capital that it needs by the fourth quarter," she said. Gee thanks.
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