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AOL earnings: Business as usual

Wall Street analysts are not expecting any big surprises from AOL Time Warner as it gears up to announce its quarterly earnings Wednesday.

Wall Street analysts are not expecting any big surprises from AOL Time Warner as it gears up to announce its quarterly earnings Wednesday.

Analysts estimate that AOL Time Warner will report pro forma earnings of 28 cents a share for the June quarter, according to First Call's consensus estimate. Much of the media titan's growth will stem from the jewel in its crown: the America Online unit.

So far, the vaunted benefits of the merger seem to be working. The company has touted its ability to cross-promote its laundry list of TV, publishing, online and cable businesses during slower advertising periods to drive subscriptions. Despite a brutal advertising slowdown that has hurt many of the company's competitors, analysts expect AOL Time Warner to take less of a hit, in part because less than 25 percent of its revenue comes from advertising.

"What this company is able to do is to use girth in marketplace and strategic importance to hold up better than many of its competitors," said John Corcoran, an equity analyst at CIBC World Markets.

That's not to say the company is off the hot seat. Top executives have promised aggressive financial targets and will be under considerable pressure to meet those gains. For the year, executives said AOL Time Warner will generate $40 billion in revenue and $11 billion in earnings before interest, taxes, depreciation and amortization (EBITDA) for the year.

As a result, the company has undergone significant numbers of layoffs and has consolidated some of its businesses, such as its broadcast network division, to trim costs. The company has also raised monthly subscription rates for its flagship AOL service to $23.90 from $21.95, which went into effect earlier this month.

AOL has said that the price hike was not a measure to facilitate meeting its earnings projections. Oftentimes, customer defection accompanies a price hike, but for AOL the effects remain to be seen.

Analysts will be paying close attention to whether the advertising slowdown striking AOL Time Warner's competitors has shown up in its own balance sheet. Even though the lion's share of AOL's earnings stems from a steady tide of subscription dollars, there are still businesses that have considerable exposure to the advertising doldrums.

"One of the big issues will be on the publishing side," said Arthur Newman, an equity analyst at ABN AMRO. "Magazines have been doing poorly as of late. We would like to see how well they're holding up."

Meanwhile, questions have been raised over what effect the collapsing online advertising market has had on the company. Internet bellwethers Yahoo and DoubleClick both made statements during their recent earnings reports that online advertising would not pick up until mid-2002.

Analysts do not expect the AOL unit to report any drastic revenue shortcomings, however. Yahoo and DoubleClick rely heavily on online advertising dollars and are not known for successfully tapping other businesses apart from their core.

In contrast, analysts say they expect AOL to continue pushing for new subscribers on its marquee services such as AOL and Time Warner Cable. Meanwhile, the company is preparing to launch a high-speed version of AOL on its cable system by the end of the year, a service for which it can charge higher fees. That could serve as another means of buffering the advertising slowdown.

"Despite the continuing weakness in television, online and print advertising, we believe AOL's reach and cross-platform solutions will help shield the company from some of the challenges faced by many other traditional media companies," wrote Jordan Rohan, an equity analyst at Wit SoundView.