Wall Street worries over AOL earning targets

Gerard Klauer Mattison analyst Jeffrey Logsdon issued a research note Monday questioning whether AOL will be able to reach its stated goal of $11 billion in earnings before interest, taxes, deprecation and amortization (EBITDA) for the year.

"It would require almost unprecedented growth in the latter half of 2001 in order to achieve $11 billion in EBITDA, even with $1 billion in cost savings," Logsdon wrote in a research note.

Wall Street analysts are worried that AOL Time Warner's broad exposure to advertising-based income--through its online, network and cable TV, and publishing divisions--will hurt its ability to increase revenues.

Advertising woes have hit companies hard in just about every medium. The list of the stricken includes online companies such as DoubleClick and Yahoo, publishers such as Dow Jones, and broadcast companies such as Viacom.

Logsdon dropped revenue estimates for 2001 to $40.42 billion from $41.37 billion and lowered 2001 EBITDA estimates to $10.81 billion from $10.85 billion.

He also reduced 2002 estimates to $46.83 billion from $47.89 billion for revenue and to $12.57 billion from $13.43 billion for EBITDA. Still, Logsdon noted that his estimates represent "very healthy growth, on a standalone basis, in a more difficult economic environment."

AOL Time Warner executives were not immediately available for comment. They have so far stuck to their $11 billion EBITDA target.

Logsdon is not the first to fret about AOL Time Warner's earnings targets. Last month, ABN AMRO analyst Arthur Newman also lowered his estimates for EBITDA. These concerns caused Merrill Lynch analyst Henry Blodget to issue a note explaining why he hadn't dropped his EBITDA estimates.

Still, AOL Time Warner topped analysts' expectations for earnings in its first quarter but saw revenues fall short of predictions. The company reported EBITDA for that quarter of $2.4 billion, up from $2.1 billion in the year-ago quarter.

ABN AMRO's Newman dropped his EBITDA estimates at the same time that he lowered his rating on the stock from "buy" to "add." He now predicts EBITDA at $10.7 billion for the year.

Newman noted that the company could achieve the $11 billion figure if it raises monthly subscriber fees for its America Online Internet service by $2 in the middle of the year. A price increase of $2 per month at midyear could boost EBITDA by more than $600 million.

That rate increase is also key to Blodget's predictions. Chief Executive Steve Case said in January that a rate increase was "in the cards" for the company.

AOL Time Warner has not raised its fees since April 1998, when the cost of unlimited monthly access jumped to $21.95 from $19.95. Besides raising fees, Blodget said the company will need to achieve $745 million in merger-related cost savings, see its AOL division revenues grow by 52 percent, and increase its cable division revenues by 17 percent.