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AOL outlook could turn sour

In the wake of last week's attacks and a worsening advertising market, Wall Street analysts are beginning to wonder if the company will be next to declare a financial shortfall.

In the wake of last week's terrorist attacks and a worsening advertising market, some Wall Street analysts are beginning to wonder if AOL Time Warner will be next to declare a financial shortfall for the quarter.

Finances have been bleak for the media sector since the attacks. Many media companies lost significant revenue when their broadcast networks cut ads during coverage of the World Trade Center disaster. On top of an already struggling advertising market and a weakened economy, analysts are less confident that AOL Time Warner, which owns CNN and the WB Network, will reach its target for $40 billion in revenue and $11 billion in earnings before interest, taxes, depreciation and amortization (EBITDA) for the year.

"When is AOL going to preannounce and how big will it be?" asked Jordan Rohan, an equity analyst at Wit SoundView. "Disney's done it, Viacom's done it, it's time for AOL to do it."

On Friday, Merrill Lynch's Henry Blodget became the latest analyst to downgrade his financial projections for AOL Time Warner. Blodget lowered his revenue projections for 2001 to $38.3 billion from $39 billion and EBITDA to $10.1 billion from $10.7 billion. Wall Street expects AOL Time Warner to post revenues of $39.1 billion for 2001, according to First Call consensus estimates.

Blodget also cut estimates for 2002 revenue to $42 billion from $44 billion and EBITDA to $12.2 billion from $13 billion.

Meanwhile, the company's America Online unit this week swallowed a double dose of bad news when two of its marketing partners, Talk America and PurchasePro, pulled out of their multimillion-dollar payment guarantees. Though these cancellations will not significantly affect AOL Time Warner's projections, they underscore the scope of the anemic online advertising market.

Pulled into the darkness
AOL Time Warner's financial performance is a testament to whether experiments in converging new and traditional media can hold up in tough times. Executives have publicly stated that the company's various revenue streams could flow through a recession better than ad-dependent media companies.

AOL Time Warner only generates 25 percent of its overall revenue from advertising, but that's enough for the company to feel the effects of the slowdown. The events of last week are also rippling through its businesses.

"Our company has been focused on doing what we do best, which is informing and connecting people in this terrible tragedy," said AOL Time Warner spokesman Edward Adler. "Of course, all businesses in general have been affected, and ours is no different."

Meanwhile, AOL Time Warner's primary revenue generator, its AOL Internet division, appears to be standing on shakier ground.

During the headier days of the Internet, the unit lured companies, many of them Internet start-ups, into multiyear, multimillion-dollar marketing deals. With the economy heading further south, the division risks prematurely losing many of these payments from cash-strapped companies.

This week, Internet companies PurchasePro and Talk America pulled out of agreements to pay AOL millions to market their services. PurchasePro said Monday that it will not pay AOL the remaining $20.7 million expected from a $25 million advertising and marketing agreement struck last year. Then Talk America on Thursday ended its agreement to provide long-distance telephone service to AOL users. As part of the scrapped agreement, AOL will reduce Talk America's debt by $20 million to $34 million.

Talk America and PurchasePro join a growing list of companies that have pulled out of agreements with AOL, including Drkoop.com, 1-800-Flowers.com and VitaminShoppe.com, to name a few. As more of these deals dissolve, analysts expect advertising and e-commerce revenues from AOL to decline as well.

"The impact is two-sided: On one hand, not having these kinds of relationships will impact AOL's advertising line," said Youssef Squali, an equity analyst at investment bank First Albany.

"But my gut feel is those have tended to be minor partners and AOL has aggressively been trying to move away from weakened Internet companies and more toward large enterprises that need an all-encompassing media platform including print, broadcast and online."

Indeed, AOL Time Warner's advertising efforts have focused on large packages that span many units. Last month, the company signed a deal with Toyota to market the upcoming Camry 2002 throughout its print properties, such as Time magazine, People and Entertainment Weekly, as well as its online assets, including Netscape and CompuServe.

Nevertheless, the void in the AOL division left by struggling advertising partners will likely stall its ad-based revenues for the next quarter. Squali has lowered his revenue expectations for the AOL unit next quarter to $700 million from $749 million because of last week's crisis.

In addition, when AOL Time Warner reports its third-quarter earnings Oct. 17, analysts anticipate an increase in interdepartmental advertising. AOL Time Warner has continually touted its ability to market its businesses through other divisions, but analysts say the company still needs to show growth from outside sources.

"You can't make a business out of selling ads to yourself," said Wit SoundView's Rohan.