AOL Time Warner climbs on big gains

Company executives also reiterated their earnings goals for the year despite the signs of overall weakness in the economy.

"When you look at this quarter, the real strength of AOL Time Warner is magnified by our ability to deliver strong results in this type of market," Chief Executive Gerald Levin told financial analysts. "We have a lot of capability in running this type of company."

Investors seemed to agree. Shares in the Internet and media giant rose $5.10, or 12 percent, to $49 by the 1 p.m. PDT close of regular trading Wednesday.

The company reported revenue of $9.1 billion, compared with $8.3 billion from the same period a year ago. Net income per share before charges reached 23 cents, beating Wall Street's consensus estimate of 20 cents per share.

EBITDA (earnings before interest, taxes, depreciation and amortization) jumped 20 percent to $2.1 billion from the preceding quarter. Free cash flow reached $651 million, a more than 400 percent increase from $128 million during the same period last year.

AOL Time Warner attributed much of its growth to a 9 percent increase to $3.9 billion in subscription revenue. Meanwhile, advertising reached $2.1 billion, a 10 percent increase from the previous quarter.

Including merger-related and pretax cash charges of $620 million, AOL Time Warner reported a net loss of $1.4 billion, or 31 cents a share. That compares with last year's $1.5 billion in net losses.

"We couldn't be more pleased with AOL Time Warner's performance in our first quarter as a new company," Levin said in a statement. "Our results met or exceeded all key operating and financial targets."

Meeting aggressive targets
Each reporting quarter will be crucial for the company because executives have set aggressive revenue and EBITDA goals. Executives have repeatedly said the company will reach $40 billion in revenue and $11 billion in EBITDA for the year 2001.

Based on Wednesday's report, the company would make $36.3 billion in revenue and $8.3 billion in EBITDA for the year, according to CIBC World Markets analyst John Corcoran. That would likely mean further cost-cutting and more pressure to squeeze out revenue through cross-marketing between its divisions.

Nevertheless, analysts continue to express confidence in AOL Time Warner's ability to meet its numbers. As other companies in the media and Internet fields are slashing estimates or warning of the economy's tug on their bottom lines, AOL Time Warner could be better insulated in the souring economy.

"As the economy continues to weaken, it will be a challenge for them. But as for now, they're on track," Corcoran said.

While addressing concerns about advertising growth, Chief Financial Officer Michael Kelly expressed confidence that advertising will continue to improve during the second half of the year. Kelly noted that much of this growth will come from ad deals that span many units within AOL Time Warner.

"We are starting to see some signs of an advertising pickup," Kelly told financial analysts. "We didn't start delivering on cross-platform opportunities until we got into this quarter. We do feel quite strongly that we're well positioned for the year."

Performance by division
Investors and analysts have highlighted the America Online service and Time Warner Cable as the company's main growth drivers. Both divisions reported strong gains in their businesses.

As of March 31, the company's AOL Internet service provider grew by 2 million new subscribers to 28.8 million. Earlier this week, AOL announced that it had reached 29 million subscribers, a figure that includes people using the service as a free trial.

AOL also reported $2.1 billion in revenue during the period, with a 37 percent increase in advertising and commerce revenue.

Time Warner Cable increased its digital cable and high-speed Internet subscriptions to 3.3 million, up 24 percent from the previous quarter. Revenue per subscriber also increased by 11 percent to $48.51. AOL Time Warner's Road Runner cable-modem ISP reported 1.2 million subscribers. Revenue reached $1.6 billion with a 17 percent increase in advertising and commerce.

"The bottom line is those divisions are stable, and they tend to be more recession-resistant," Corcoran said.

Meanwhile, the company's film entertainment division reported $2.2 billion in revenue, a 17 percent increase from the same period last year. Much of the grow was attributed to the domestic releases of "Exit Wounds" and "See Spot Run" and to continued gains from the worldwide box-office take from "Miss Congeniality." EBITDA decreased 30 percent to $113 million because of the timing and number of new releases and because of marketing and distribution costs.

Cable TV's gains
The network's division, which encompasses the WB Network, HBO and Turner Broadcasting properties such as CNN, increased revenue to $2.2 billion, up 17 percent from last year. Its advertising and commerce revenue grew a mere 1 percent to $589 million, while EBITDA grew 34 percent to $449 million from last year.

Jordan Rohan, an analyst at Wit SoundView, was pleasantly surprised by the performance of the cable networks in this division.

"I attribute most of this to cost-cutting initiatives at CNN.com," he said. "There are clearly signs of strength in the cable division that I did not expect."

Warner Music Group, however, showed a 6 percent revenue decline to $881 million and a 7 percent decline in its EBITDA to $94 million from last year. The decline was attributed to a realignment of its business and a changing marketplace.

The publishing division, which includes Time Inc. magazines, increased revenue by 3 percent to $966 million.