Subscriber, ad declines weigh on AOL

The company reports a profitable first quarter with overall revenue jumping 6 percent to $10 billion, although its online unit put a drag on results.

Jim Hu Staff Writer, CNET News.com
Jim Hu
covers home broadband services and the Net's portal giants.
Jim Hu
5 min read
AOL Time Warner on Wednesday reported a profitable first quarter, although its online unit put a drag on revenue.

The media giant said that net income reached $396 million, or 9 cents a share, for the quarter that ended March 31. That reversed a year-ago loss of $54.24 billion, or $12.25 a share--the largest corporate quarterly loss ever reported--after it recorded a massive asset writedown linked largely to the America Online unit.

A consensus of analysts had expected earnings of 4 cents a share, according to First Call.

Overall revenue jumped 6 percent from the year-ago period to $10 billion, largely from gains in cable and Internet subscriptions, and its entertainment businesses. Advertising revenue, however, continued to decline, sinking 5 percent to $1.3 billion because of decreases in its AOL and cable divisions. Other revenue decreased 21 percent to $472 million because of declines in the AOL and publishing divisions.

Earnings before interest, taxes, depreciation and amortization (EBITDA) surged 14 percent year over year to $24 million, much of it stemming from a decline in charges from last year. Cash flow from operations hit $1.5 billion.

Meanwhile, AOL Time Warner's debt increased to $26.3 billion from $25.8 billion in the December quarter. As expected, the debt increase was the result of the closing of Time Warner Entertainment, as part of the company's investment split with AT&T.

"AOL pretty much blew away the EBITDA numbers. A lot of it is good news. The online unit seems to have its costs under control," said Jordan Rohan, an analyst at SoundView Technology Group. "People had assumed the AOL unit was worth zero. It's clearly worth more than that. This has to be a positive for the company."

The company also reaffirmed the 2003 revenue estimates it laid out last quarter. Revenue for the year is expected to grow in the "mid-single digits" from $41 billion in 2002, while EBITDA is expected to rise in the "low- to mid-single digits" range from $8.7 billion last year.

As for the AOL unit, the company expects revenue to be flat compared with the $9.1 billion in 2002, while advertising continues to fall 35 percent to 40 percent from $1.3 billion last year. EBITDA is expected to be flat to down 10 percent, compared with $1.5 billion last year.

Subscriber declines
The AOL unit reported that its revenue continued to decline, although a decrease in restructuring charges spurred growth in its EBITDA by 18 percent year over year. Its operating income rose 11 percent due to the EBITDA increase.

Still, overall revenue declined 4 percent. That stemmed from a 42 percent decline in ad revenue because of the end of prior contract sales, as well as a 61 percent drop in other ad revenue due to AOL's discontinuation of pop-up ads.

AOL's core dial-up subscriber base showed mixed results. AOL reported 26.2 million subscribers in the United States and 6.3 million in Europe. Despite gaining 141,000 U.S. subscribers compared with the same period last year, AOL witnessed a decline of 289,000 U.S. subscribers from the previous quarter. Europe showed an increase of 368,000 members from last year but a decline of 63,000 members from the previous quarter.

Don Logan, chairman of AOL Time Warner's media and communications group, attributed AOL's dial-up subscriber declines to the maturing of the dial-up market, an increase in churn and migration to broadband. He noted that AOL management will focus more on increasing profitability of its dial-up base and less on trying to acquire new customers.

"At AOL, 2003 is the year to stabilize the business and return to EBITDA growth in 2004," Logan said during a conference call with Wall Street analysts.

Meanwhile, the Time Warner Cable division reported a 6 percent climb in its EBITDA year over year and a revenue increase of 9 percent. These improvements were the result of a 14 percent gain in subscription revenue and improved profitability in its broadband Net access business. During the quarter, the unit added 260,000 residential broadband Net subscribers for a total of 2.7 million.

The filmed entertainment unit witnessed a 39 percent surge in EBITDA year over year and an 11 percent rise in revenue. Home-video sales, the growth in Warner Bros. Television, and successful films such as "The Lord of the Rings: The Two Towers" and "Harry Potter and the Chamber of Secrets" fueled this growth.

AOL Time Warner's TV networks division reported a 16 percent increase in EBITDA year over year on a 17 percent growth of revenue. Warner Music Group continued to show declines with a 4 percent drop in EBITDA year over year and a 3 percent dip in revenue, reflecting overall weakness in the music industry. EBITDA in its publishing division increased 2 percent year over year, while revenue rose 7 percent.

Climbing the mountain
Meanwhile, the overall direction of the company remains clear.

AOL Time Warner CEO Richard Parsons' modus operandi has shifted from unifying the company's combative divisions to reducing its mountain of debt. As his one-year anniversary at the helm nears, Parsons faces the task of selling off various Internet, media and entertainment assets to avoid "junk" status for AOL Time Warner's debt rating.

Over the past quarter, AOL Time Warner was busy selling and divesting. Earlier this week, the company announced the sale of its stake in Comedy Central to rival Viacom for $1.2 billion in cash. In March, the company ended its financial relationship with Hughes Electronics' DirecTV satellite service, initially a $1.5 billion investment.

Later this summer, the company plans to spin off its Time Warner Cable division to the public market. The offering could raise as much as $4 billion.

AOL Time Warner's biggest concern remains its AOL unit. The division has been undergoing a service overhaul in the face of plummeting online ad revenue and dial-up subscriber declines. Also in March, AOL unveiled a refurbished version of its proprietary online service in an effort to appeal to broadband users.

The launch, accompanied by a $35 million ad campaign, targets AOL dial-up subscribers who may be considering a move from the service to broadband access, dominated by cable and phone companies. People with broadband access from non-AOL providers can pay $14.95 a month to use AOL for Broadband, as the service is called.

AOL also began folding Web content from its Time Inc. corporate cousin into its proprietary service. Online versions of magazines such as People and Entertainment Weekly will now be offered exclusively in the AOL proprietary service, underscoring AOL's attempt to beef up its content offers.

Reuters contributed to this report.